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uas 


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conformity  avac  las  conditions  du  contrat  da 
fiimaga. 


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sion.  or  tha  back  covar  whan  approprlata.  All 
othar  original  copiaa  ara  filmad  baginning  on  tha 
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sion.  and  anding  on  tha  last  paga  with  a  printad 
or  illuatratad  imprasaion. 


Las  axamplairas  originaux  dont  la  couvartura  an 
papiar  aat  imprimaa  sont  fllmis  an  commangant 
par  la  pramiar  plat  at  an  tarminant  soit  par  la 
darniira  paga  qui  comporta  una  amprainta 
d'imprassion  ou  d'illustration,  soit  par  la  sacond 
plat,  salon  la  cas.  Tous  las  autras  axamplairas 
originaux  sont  filmis  an  commandant  par  la 
pramiAra  paga  qui  comporta  una  amprainta 
d'impraasion  ou  d'illustration  at  an  tarminant  par 
la  darniira  paga  qui  comporta  una  talla 
amprainta. 


Tha  last  racordad  frama  on  aach  microficha 
shall  contain  tha  symbol  — ^  (maaning  "CON- 
TINUED" .  or  tha  symbol  y  (maaning  "END"), 
whichavar  applias. 


Un  daa  symbolas  suivants  apparaitra  sur  la 
darniira  imaga  da  chaqua  microficha.  talon  la 
cas:  la  symbols  -^^  signifia  "A  SUIVRE".  la 
symbols  ▼  signifia  "FIN". 


Mapa,  piatas,  charts,  ate,  may  ba  filmad  at 
diffarant  raduction  ratios.  Thosa  too  larga  to  ba 
antiraly  includad  in  ona  axposura  ara  filmad 
baginning  in  tha  uppar  laft  hand  cornar,  taft  to 
right  and  top  to  boRom,  as  many  framas  as 
raquirad.  Tha  following  diagrams  illustrata  tha 
mathod: 


Las  cartas,  planchas.  tablaaux,  ate.  pauvant  atre 
filmis  A  das  taux  da  reduction  diffArants. 
Lorsqua  la  documant  aat  trop  grand  pour  itra 
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da  I'angia  supiriaur  gaucha,  da  gaucha  A  droits, 
at  da  haut  an  bas,  an  pranant  la  nombra 
d'imagas  nicassaira.  Las  diagrammas  suivants 
illustrant  la  mathoda. 


1  2  3 


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MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


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ESSENTIALS  OF  ECONOMIC  THEORY 


;T»^^o. 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   ■    CHICAGO 
ATLANTA   •    SAN  FRANCISCO 

MACMILLAN  &  CO.  Limited 

LONDON  •    BOMBAY  •    CALCUTTA 
MELBOURNE 

THE  MACMILLAN  LO  OF  CANADA,  Ltd. 

TORONTO 


•''-^^.-MiJ^f.-^i^ 


UMti;im: 


ESSENTIALS  OF  ECONOMIC 
THEORY 


AS  APPLIED  TO  MODERN  PROBLEMS 
OF  INDUSTRY  AND   PUBLIC   POLICY 


BY 


JOHN   BATES   CLARK 

PHOFE980B   OF    POLITICAL   ECONOMY    IN    COLUMBIA 

Ij'NIVEHSITV 

AnTHOR  OF  "THE  DISTRIBITION  OF  WEALTH," 

"THE    PHILOSOPHY    OP   WEALTH,"    "THE 

PBOBLEM   OF    MONOPOLY,"    ETC. 


Nttogork 

THE   MACMILLAN  COMPANY 
1909 


AU  rightt  reterved 


COPTHIOBT,  190T, 

Bt  the  macmillan  company. 


Set  up  and  electrotyped.     Published  October,  1907.     Reprinted 
July,  1909. 


m 

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5 

i 


PREFACE 

In  a  work  on  the  "Distribution  of  Wealth,"  which 
was  published  in  1899,  I  expressed  an  intention  of 
offering  later  to  my  readers  a  volume  on  "Economic 
Dynamics,   or  The   Laws   of   Industrial    Progress." 
Though  Mght  years  hav-  since  passed,  that  purpose 
is  still  unexecuted,  and  it  has  become  apparent  that 
any  adequate  treatment  of  Economic  Dynamics  will 
recjuire  more  than  on.-  volume  of  the  size  of  the  pres- 
ent one.     In  the  meanwhile  it  is  i)ossible  to  offer  a 
brief  and  provisional  statement  of  the  more  general 
laws  of  progress. 

Industrial  society  is  going  through  an  evolution 
which  is  transforming  its  structure  and  all  its  activi- 
ties.    Four  general  changes  are  going  on  within  the 
producing  organization,  and  the  resultant  of  them, 
under  favorable  conditions,  should  be  an  enrichment 
in  which  all  classes  would  share.     Population  is  in- 
creasing, capital  is  accumulating,  technical  methods 
are  improving,  and  the  organization  of  productive 
establishments  is  perfecting  itself;  while  over  against 
these  changes  in  industry  is  an  evolution  in  the  wants 
of  the  individual  consumer,  whom  industry  has  to 
serve.    The  nature,  the  causes,  and  the  effects  of  these 
changes   are   among   the   subjects   treated    in   this 
volume. 

The  Political  Economy  of  the  century  following 
the  publication  of  the  "Wealth  of  Nations"  dealt 
more  with  static  problems  than  with  dynamic  ones 


rr*^»,^J^^>*^<^i.tm^^m'J3 


VI 


PREFACE 


It  sought  to  obtain  kws  which  fixed  the  "natural" 
prices  of  goods  and  those  which,  in  a  like  way,  g(»\- 
erned  the  natural  wages  of  lalwr  and  the  interest  on 
capital.    This  term  natural  as  thus  used,  was  e(iuiv- 
alent  to  static.     If  the  laws  of  value,  wages,  and  in- 
terest had  at  this  time  been  correctly  stated,  they 
would  have  furnished  standards  to  which,  in  the  ab- 
sence of  all  change  and  disturbance,  actual  values, 
wages,  and  interest  would  ultimately  have  conformed. 
The  economic  theory  of  this  time  succeeded  in  for- 
mulating, correctly  or  otherwise,  principles    of  eco- 
nomic statics  and  a  fragment  or  two  of  a  science  of 
economic  dynamics,  although  the  distinction  between 
the  two  tlivisions  of  the  science  was  not  clearly  before 
the  writers'  eyes.    The  law  of  population  contained 
in  the  work  of  MaHhus  is  the  only  systematic  state- 
ment then  made  of  a  general  law  of  economic  change. 
Though  histories  of  wages,  prices,  etc.,  furnished  some 
material  for  a  science  of  Economic  Dynamics,  none 
of  them  attained  the  dignity  of  a  presentation  of  law 
or  merited  a  place  in  Economic  Theory.     Students 
of   Political   Economy   were   at   that  date   scarcely 
awakened  to  the  perception  of  laws  of  dynamics,  and 
still  less  were  they  conscious  of  the  need  of  a  systematic 
statement  of  them.     A  modest  beginning  in  the  way 
of  formulating  such  laws  the  present  work  endeavors 
to  make 

The  first  fact  which  becomes  apparent  when  eco- 
nomic progress  is  studied,  is  that  static  laws  have  a 
general  application  and  are  as  efficient  in  a  society 
which  is  undergoing  rapid  transformation  as  in  one 
that  is  altogether  chang(^I(>ss.  Water  in  a  traruiuil 
pool  is  affected  by  static  forces.  Let  a  quantity  of 
other  water  rush  in  and  there  are  superinduced  on 


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PREFACE 


VII 


these  forces  others  which  are  highly  dynamic.     The 
original   forces   are   as   strongly  operative   as   ever, 
and  if  the  inflow  were  to  stop,  would  again  reduce  the 
surface  to  a  level.    The  laws  of  hydrostatics   affect 
the  waters  in  the  rapids  of  Niagara  as  truly  as  they 
do  those  in  a  tranquil  pool ;  but  in  the  rapids  a  further 
set  of  forces  is  also  operative.     In  the  work  referred 
to,  issued  in  1899,  an  effort  was  made  to  isolate  the 
phenomena  of  Economic  Statics  and  to  attain  the 
laws   which   govern   them.     Necessarily   this   study 
made  a  certain  impression  of  unreality,  since  it  put 
out  of  sight  changes  which  are  actually  going  on  and 
are  the  conspicuous  fact  of  modern  life.     It  assumed 
the  conditions  of  a  world  without  any  such  movement 
and  endeavored  to  formulate  laws  which,  in   such 
a  condition,  would  fix  standards  of  value,  wages, 
interest,  etc.     It  put  actual  changes  out  of  sight! 
i'ltentionally  and  heroically,  but  with  a  full  recognition 
of  the  fact  that  they  are  actually  taking  place  and 
must  in  due  time  be  introduced  and  studied.     We  live 
in  what  is  par  excellence  an  age  of  progress,  and  it  is 
in  part  for  the  sake  of  perceiving  the  laws  of  progress 
that  we  first  disentangle  from  them  the  laws  of^rest 
and   make  a   separate   study  of   these.     The  world 
from  which  change  is  excluded    is  unreal,  but  the 
static  laivs  which  can  be  most  clearly  discerned  by 
mentally  creating  such  a  world  have  reality.     Every 
day's  transactions  are  governed  by  them  as  truly  as 
a  physical  element  like  water  in  active  movement  is 
affected  by  forces  which,  if  they  acted  alone,  would 
bimg  It  to  a  state  of  permanent  rest.    The  first  pur- 
pose, therefore,  of  the  present  work  is  to  show  the 
presence  and  dominance  in  the  real  world  of  the  forces 
described  in  the  earlier  work.    It  brings  static  laws 


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PREFACE 


into  view  and  endeavors  to  show  how  they  act  at 
any  one  particular  stage  of  industrial  evolution.  Even 
while  changes  are  examined,  the  fact  is  perceived 
that  there  are  steadily  at  work  forces  which,  if  changes 
should  cease,  would  make  society  conform  to  a  certain 
imaginary  static  model  and  makes  wages  and  interest 
also  conform  to  static  standards. 

Another  purpose  of  the  work  is  to  examine  seriatim 
the  eflfects  of  different  changes,  to  gauge  the  prob- 
ability of  their  continuance,  and  to  determine  the 
resultant  of  all  of  them  acting  together.  It  is  impor- 
tant to  know  under  what  conditions  changes  proceed 
at  a  normal  rat  ,  and  when  the  standard  of  wages 
rises  as  it  naturally  should.  As  the  actual  rate  of 
wages  pursues  its  risinjr  standard,  but  lags  somewhat 
behind  it,  it  is  necessary  to  know  what  determines 
the  interval  between  the  two,  and  when  the  interval 
is  normal.  What  is  called  "economic  friction"  is 
the  cause  of  this  interval  and  is  an  element  that  is 
amenable  to  law. 

There  is  to  be  studied,  not  only  the  friction  which 
obstructs  the  action  of  natural  forces,  but  positive 
perversions  of  the  forces  themselves.  Of  these  the 
chief  is  monopoly;  and  its  influence,  its  growth,  the 
sources  of  its  power,  and  its  prospect  of  continuance 
have  to  be  determined.  The  actual  tendencies  of  the 
economic  system  are  against  it,  and  so  —  if  we  ex- 
cept a  few  monopolies  created  for  special  ends  —  are 
both  the  spirit  and  the  letter  of  the  civil  law.  In  a 
country  in  which  law  held  complete  sway,  all  objec- 
tionable monopolies  would  be  held  in  repression.  In 
order  to  see  how  much  economic  forces  can  be  made 
to  do  in  this  direction,  the  present  work  discusses  rail- 
roads and  their  charges,  and  some  of  the  practices 


PREFACE 


IX 


of  great  industrial  corporations,  and  tries  to  determine 
what  type  of  measures  a  government  should  take  in 
dealing  with  these  powerful  agents.  In  connection 
with  monopoly  and  with  the  conditions  of  economic 
progress  a  study  is  made  of  trade  unions,  strikes, 
boycotts,  and  the  arbitration  of  disputes  between 
employers  and  employed,  and  also  of  the  policy  of 
the  state  in  connection  with  them,  and  with  money 
and  protective  duties. 

It  is  my  belief  that  students  should  become  ac- 
quainted with  the  laws  of  Economic  Dynamics,  and 
that  they  can  approach  the  study  of  them  advanta- 
geously only  after  a  study  of  Economic  Statics.  The 
present  work  is  in  a  form  which,  as  is  hoped,  will 
make  it  available  for  use  in  class  rooms,  not  as  a 
substitute  for  elementary  text-books,  but  as  sup- 
plementary to  them.  It  omits  a  large  part  of  what 
such  books  contain,  presents  what  they  do  not  con- 
tain, and  tries  to  be  of  service  to  those  who  wish  for 
more  than  a  single  introductory  volume  can  offer. 

An  essential  part  of  the  theory  of  wages  here  stated 
was  presented  in  a  paper  read  before  the  American 
Economic  Association,  in  December,  1888,  and  pub- 
lished in  a  monograph  of  the  American  Economic 
Association  in  March,  1889;  and  other  parts  of  this 
theory  were  issued  at  intervals  following  that  date. 
The  theory  of  value  was  published  in  the  New  Eng- 
lander  for  July,  1881.  I  had  not  then  chanced  to  see 
the  early  statements  of  the  principle  of  marginal 
appraisal  contained  in  the  works  of  Von  Thiinen  and 
Jevons,  and  did  not  consciously  borrow  anything 
from  their  writings,  but  I  gladly  render  to  them  the 
credit  that  is  their  due.  I  do  not  fear  that  I  shall  be 
supposed  to  have  borrowed  other  parts  of  the  general 


PREFACE 


theory  here  offered.  The  theory  of  capital  here 
stated  wa-  first  presented  in  a  monograph  of  the 
American  Economic  Association  for  May,  1888,  and 
the  discussion  of  money  of  which  the  present  work 
gives  a  summary,  in  articles  in  the  Political  Science 
Quarterly  for  September,  1895,  and  for  June  and  Sep- 
tember, 1896.  The  discussion  of  the  relation  of  pro- 
tective duties  to  monopoly  appeared  in  the  same  quar- 
terly for  September,  1904. 

The  author  should,  perhaps,  apologize  for  the  few- 
ness of  the  citations  from  other  works  which  this 
volume  contains.  The  richness  of  the  recent  litera- 
ture of  Economic  Theory,  especially  in  America, 
would  have  made  it  necessary  to  use  much  space  if 
the  resemblances  and  the  contrasts  presented  by  points 
in  this  volume,  and  corresponding  points  in  other 
volumes,  had  been  noted. 

Worthy  of  special  attention,  if  citations  had  been 
given,  would  have  been  the  writings  of  Professors 
Irving  Fisher,  Simon  N.  Patten,  and  Frank  A.  Fetter 
of  this  country,  and  Professor  Friedrich  von  Wieser 
of  Prague,  who  have  worked  in  various  parts  of  the 
same  field  in  which  the  studies  here  offered  belong, 
and  also  those  of  Minister  Eugen  von  Bohm-Bawerk 
of  Vienna,  who  has  treated  some  of  the  same  themes  in 
a  strongly  contrasted  way.  If  merited  attention 
were  paid  to  the  works  of  Hadley,  Taussig,  Carver, 
Scligman,  Giddings,  Seagcr,  Walker,  antl  a  host  of 
eminent  foreign  scholars,  a  large  part  of  the  space 
in  the  book  would  have  to  be  thus  preempted. 

I  desire  most  gratefully  to  acknowledge  the  assist- 
ance which  in  the  :  eparation  of  this  book  I  have 
received  from  my  colleague,  Professor  H.  L.  Moore 
of  Columbia  University,   from  my  son,   Mr.   John 


PREFACE 


XI 


Maurice  Clark,  Fellow  in  Economics  in  Columbia  Uni- 
versity, and  from  my  former  colleague,  Professor  A.  S. 
Johnson  of  the  University  of  Nebraska.  Besides  read- 
ing the  manuscript  and  offering  valuable  suggestions. 
Professor  Johnson  has  kindly  taken  upon  himself 
the  reading  of  the  proof. 

JOHN  BATES  CLARK. 


3 


S^5Si?3^k^J[^ 


CONTENTS 


CIIAPTIK 
I. 

II. 

III. 

IV. 
V. 

I 

VI. 

VII. 

VIII. 

IX. 

X. 

XI. 

XII. 

XIII. 

XIV. 

XV. 

XVI. 

XVII. 


xvm. 

XIX. 
XX. 


VAsa 

Wealth  and  its  Origik 1 

Varieties  of  Economic  Goods       ...  20 

The  Measure  of  Consumers'  Wealth         .  39 

The  Socialization  of  Industry    ...  59 
Production  a  Synthesis;  Distribution  an 

Analysis 74 

Value    and    its    Relation    to    Di/FERENT 

Incomes 92 

Normal  Value 114 

Wages 127 

The  Law  of  Interest 146 

Rent 159 

Land  and  Artificial  Instruments       .        .  174 

Economic  Dynamics 195 

The  Limits  of  an  Economic  Society   .        .  210 
Effects    of    Dynamic    Influences    within 

THE  Limited  Economic  Society  .        .        .  229 
Perpetual  Change  of  the   Social  Struc- 
ture           244 

Effect    of    Improvements   in  Methods  of 

Production 256 

Further    Influences    which    reduce    the 
Hardships       entailed        by       Dynamic 

Chan*  E8 282 

Capital     as     affected     by     Changes     of 

Method ;J01 

The  Law  of  PoruLATioN         ....  321 

The  Law  of  Accumulation  of  Capital      .  339 
xiii 


^iwWt.la^.^^ 


XIV 


CONTENTS 


OHAmK  PAOI 

XXI.    Conditions  insuring  Progress  in  Method 

AND  Organization 358 

XXII.    Influences   which   pervert  the   Forces 

OF  Progress 372 

XXIII.  General  Economic  Laws  affecting  Trans- 

portation      396 

XXIV.  The    Foregoing    Principles    applied    to 

THE  Railroad  Problem    ....  416 
XXV.    Organization  of  Labor       ....  451 
XXVI.    The  Basis  of  Wages  as  fixed  by  Arbi- 
tration          470 

XXVII.    Boycotts  and  the  Limiting  of  Products  503 

XXVIIT.    Protection  and  Monopoly  ....  517 

XXIX.     Leading  Facts  concerning  Money    .        .  538 

XXX.    Summary  of  Conclusions     ....  555 


INDEX 


563 


i:^^^m^^'^^L:m^d<imkL .      ijp^^* 


A' 


ESSENTIALS  OF  ECONOMIC  THEORY 


'iMm^ 


ESSENTIALS  OF  ECONOMIC  THEORY 


CHAPTER  I 


WEALTH   AND  ITS   ORIGIN 

The  creation  and  the  useof  wealth  are  everywhere 
governed  by  natural  laws,  and  these,  as  discovered 
and  stated,  constitute_the._Bcience  of  Economfcs. 
Some  of  them  come  into  operation  only  when  mCn 
live  in  more  or  less  civilized  societies  and  work  in  an 
I  organized  way,  while  others  are  operative  wherever 
{men  work  at  all.  Every  man  who  lives  must  have 
something  that  can  be  called  wealth,  and,  unless  it 
is  given  to  him,  he  must  do  something  in  order  to 
get  it.  A  solitary  hunter,  living  in  a  cave,  eating 
the  flesh  of  animals  and  clothing  himself  in  their  skins, 
would  create  wealth  and  use  it;  but  he  would  not 
take  part  in  a  social  kind  of  industry.  What  he  does 
could  not  be  described  as  a  bit  of  "social," "national," 
or  "political"  economy.  Yet  the  gaining  of  his 
living  would  be  an  economic  operation  and  would 
involve  a  creating  and  using  of  wealth.  A  statement 
of  the  laws  governing  the  processes  by  which  such  a 
man  makes  the  earth  yield  to  him  means  of  support 
and  comfort  would  constitute  a  Science  of  the  Econ- 
omy of  Isolated  Life,  which  is  a  part  of  the  general 
Science  of  Economics. 

Primitive  Capital.  —  If  an  isolated  man  hunts  with 
good  implements,  he  gets  more  game  than  he  would 
have  done  if  he  had  not  used  some  of  his  time  in 


2  ESSENTIALS   OP   ECONOMIC  THEORY 

making  such  implements.    It  pays  such  a  man  to 
mterrupt  his  hunting  long  enough  to  make  a  spear  or 
a  bow  and  arrows.    Tliis  amounts  to  saying  that  it 
IS  an  advantage  to  him  to  become,  in  a  simple  way 
a  capitalist  a.s  well  as  a  laborer;    for  the  primitive 
mip  ements   of   the   chase   are    forms   of  lyrmluctive 
wealth    or  capital.     Moreover,  if  he  possesses  fore- 
sight, he  will  keep  enough  food  within  reach  to  tide 
him  over  periods  when  game  is  not  to  be  had,  and 
such  a  store  is  another  form  of  capital. 

The  Field  of  General  Economics. -The  economy 
of  a  man  who  works  only  for  himself  is  subject  to 
laws  that  are  based  on  his  own  nature  and  the  char- 
acter  of  his  material  environment.     Because  he  is 
what  he  IS  and  because  nature  is  what  it  is  there  is 
a  certain  way  in  which  he  must  proceed,  if  he  will 
live  at  all,  and  there  are  certain  conditions  which 
must  exist,  if  he  is  to  live  well.    The  inherent  pro- 
ductive power  of  labor  and  of  capital  is  of  vital 
concern  to  him,  since  he  is  both  a  laborer  and  a  capital- 
ist;  but  he  is  in  no  way  interested  in  what  we  com- 
monly call  the  relations  of  labor  and  capital,  since 
that  expression  always  suggests  the  dealings  of  one 
class  of  men,  who  labor,  with  another  class,  who  own 
or  control  productive  wealth.    The  study  of  such 
relations  takes  us  at  once  into  the  domain  of  Social 
Economy;    but  we  can  study  certain  universal  laws 
of  wealth  without  at  all  entering  that  domain.    When 
we  speak  of  the  power  that  resides  in  a  bow  and 
arrow  we  refer  to  a  truth  of  General  Economics  and 
one  which  illustrates  the  inherent  power  of  capital 
though  we  may  be  far  from  thinking  of  lenders  and 
borrowers  in  a  modern  "money  market"  or  of  deal- 
ings of  any  one  class  of  men  with  any  other. 


WEALTH   AND   ITS   ORIGIN 


3 


A 


The  Field  of  Social  Economics.  —  The  momont  that 
we  bt^gin  to  exaniirn>  economic  relatiojis  that  different 
classes  of  men  sustain  to  each  other,  we  enter  the  realm 
of  Social  Economics;  and  we  do  thia  wicncver.  we 
study  modern  business  dealings.  Even  our  hunter 
would  take  part  in  a  social  economy  if  he  began  to 
sell  some  of  his  game;  and  from  that  time  on  his 
income  would  depend,  not  wholly  on  his  relation  to 
material  nature,  but  partly  on  his  relation  to  other 
men.  A  good  market  for  his  game  would  come  to 
be  of  the  greatest  importance  to  him ;  and  a  market 
for  anything  implies  a  social  method  of  securing 
wealth. 

Fundamental  Facts  Common  to  Primitive  Life  and 
Social  Life.  —  The  relations  which  men  sustain  to 
each  other  in  civilized  industry  are  thrown  into  the 
foreground  in  the  science  of  Social  or  "Political" 
Economy.'  It  is  an  organizefl  system  of  industry 
in  which  we  are  engaged,  and  it  is  that  which  we 
care  most  to  understand.  Until  recently  we  have 
had  a  far  less  satisfactory  understanding  of  the  social 
element  in  industry  —  that  is,  of  the  relations  that 
men  who  are  producing  wealth  sustain  to  each  other 

'  Past  usage  renders  the  somewhat  misleading  term  Polifical 
Economy  more  available  than  tlie  more  acorately  descriptive 
term  Social  Economics,  as  the  title  of  the  science  which  treats 
of  the  creation  and  use  of  wealth  by  an  organized  society. 
Either  title  implies  the  existence  of  such  an  organization, 
but  the  word  political  calls  attention  to  the  fact  that  it  is 
under  a  government.  The  fact  that,  in  a  study  of  wealth, 
IS  most  important  is  that  the  exchanges  of  products  which 
spontaneously  take  place  create  an  industrial  society  whose 
activities,  going  on  as  they  do  under  a  government,  constitute 
the  subject  of  the  studies  which  are  properly  indicated  by  the 
traditional  term,  Political  Economy.  Gjvemment  as  such 
IS  not  the  subject  of  those  studies. 


4  ESSENTIALS   OF   ECONOMIC  THEORY 

-  than  we  have  had  of  such  general  facts  as  a  primi- 
tive  producer  needs  to  know.      We  have  had    for 
exaniple,  much  information  concerning  the  materials 
which  the  earth  contains  and  the  way  to  make  them 
useful.     \\  e  have  had  a  practical  knowledge  of  what 
wealth  .s  and  of  the  mode  of  creating  it,  and  we  have 
been  able  to  identify  it  as  we  have  seen  it  either  in 
the  raw  or  the  finished  state.     We  have  known  what 
labor  IS,  how  it  proceeds  and  what  helps  it  needs  to 
cmable  it  to  make  clothing,  to  prepare  food,  etc. 
VVe  have  not  known  as  much  about  the  way  in  which 
the  modern  market  for  such  products  is  regulated, 
and  how  a  modern  tailor  or  baker  shares  gai.n  with 
the  man  who  employs  him  and  provides  him  with 
materials  and  tools,  and  the  main  purpose  of  study- 
ing Economics  is  to  get  an  understanding  of  such 
social  facts;    but  this  cannot  be  done  without  first 
bringing  before  the   mind  the  more  general   facts 
concerning  the  inherent  nature  of  wealth  itself  and 
of   the   activities   that   are   always   necessary -in 
uncivilized  life  as  well  as  in  civilized  -  for  creating 
and  u.sing  it. 

General  Facts  First  in  the  Natural  Order  of  Study  — 
The  primitive  and  general  facts  concerning  industry, 
which,  m  a  broad  sense,  is  the  creating  of  wealth 
need  to  be  known  before  the  social  facts  can  profit- 
ably be  studied;  and  a  statement  of  the  principles 
of  Political  Economy  should  therefore  begin  by  pre- 
sentmg  a  body  of  truth  which  is  independent  of 
politics  and  sociology  and  so  general  that  it  is  illus- 
trated even  in  that  simplest  of  all  c  editions,  in 
which  no  market  exists  and  every  man  makes  bv 
his  own  labor  all  the  goods  that  he  u.scs.     The  w(>altii 
of  a  Crusoe,  that  of  a  solitary  Esquimau,  and  that 


WEALTH  AND   ITS  ORIGIN 


^  of  a  pygmy  In  equatorial  Africa  have  laws  as  well 

as  that  of  a  European  or  /\rn('ncan  employer  or 
bondholder.  The  (jualities  in  matter  which  make 
a  share  of  it  important  for  promoting  the  welfare  of 
its  possessor  can  be  detected  in  the  simplest  com- 
modities that  are  anywhere  used.  Al]_  kinds  of 
industrial  j)roducts  ha  vie.  a  fiomnion  origin.  I^bor 
and  capital  act  together  in  making  a  birch  canoe 
as  truly  as  they  do  in  producing  a  transatlantic 
liner;  and  the  productive  power  of  each  of  these 
two  agents  is  everywhere  governed  by  certain  general 
laws.  Before  ascertaining  what  is  true  of  wealth 
when  capital  has  become  complex  and  when  laborers 
have  become  specialists,  each  producing  one  particu- 
lar part  of  one  pro  .ct  and  securing  many  finished 
goods  in  exchange  fur  it,  it  is  well  to  state  some  facts 
relating  to  wealth  which  are  so  general  that  they 
appear  in  all  stages  of  civilization. 

The  Nature  of  Wealth.— The  old  English  word 
weal  describes  a  condition  of  life.  It  is  the  state 
of  being  "  well  off,"  or  of  having  one's  wants  amply 
supplied.  Well-being  in  a  broad  sense  of  the  term 
may  depend  largely  on  a  man's  state  of  health, 
his  temperament,  his  conscience,  or  his  relation  to 
his  friends;  but  the  weal  that  is  so  secured  is  not 
described  as  a  state  of  wealth.  That  depends  on 
the  possession  of  useful  and  material  things,  and 
the  rich  man  ha'-  more  of  them  than  other  men. 
'The  term  iccalth,  wi  ""h  originally  signified  the  state 
;  of  being  rich,  afterwards  came  to  be  applied  to  the 
things  which  make  a  man  rich,  and  it  is  thus  that 
the  term  is  ii«cd  in  the  science  of  Econoniics. 

What  Things  constitute  Wealth.  —  It  is  clear  that 
useful  things,  like  air,  which  are  at  hand  in  unlimited 


6 


ESSENTIALS   OF   ECONOMIC  THEORY 


quantity,  do  not  make  any  one  rich  in  this  com- 
parative sense,  for  they  benefit  all  alike;  and,  in  so 
far  as  they  are  concerned,  aU  men  are  on  the  same 
level  of  welfare.     Moreover,  since  they  are  so  abun- 
dant as  to  shower  benefits  everywhere  in  profusion, 
the  quantity  of  them  that  a  man  has  at  his  disposal 
may  be  lost  or  thrown  away  with  entire  impunity. 
He  would  only  have  to  help  himself  again  from  the 
abounding  supply  which  nature  thrusts  on  him  in 
order  to  be  as  well  off  as  he  was  before.    A  bucket- 
ful of  water  on  the  shore  of  Lake  Superior  is  of  no 
in-iportance  to  the  man  who  has  it.     If  it  were  spilled 
on  the  sand,  the  man  would  have  only  to  dip  up 
another   bucketful,    with  an   expenditure   of  effort 
that  would  be  too  small  to  take  account  of.     If, 
however,   fresh  water  were  scarce,  every  bucketful 
would  have  its  importance,   and  the  loss  of  that 
quantity  would  make  a  distinct  impression  on  the 
man's  well-being.      Whenever  each  particular  part 
of  the  supply  has  thjp  power  to  make  a  possessor 
better  off  than  he  wouid  be  without  it,  the  substance 
18  f.  form  of  wealth.     The  quality  of  being  specifi- 
cally important  i^  therefore,  the  esscntiarattribute 
of  all  the  concrete  forms  of  wealth.    Sand  by  the 
seashore   does   not    have   any  specific    importance, 
smce  it  is  so  abundant  that  the  gain  or  loss  of  a 
wheelbarrow   load   would  not  make  a  man  better 
off  or  worse  off;  but  a  pile  of  sand  by  the  side  of  an 
unfinished   building  has  this   quality.    There  every 
barrow  load  is   of    consequence,    for   the    available 
quantity  is  so  s:nall  that  diminutions  reduce  and 
additions  increase  the  wealth  of  the  possessor.    Sand 
on  tho  shore  has  tho  inherent  power  to  help  make 
mortar,  and  water  in  Lake  Superior  has  the  power 


'f^l^ 


WEALTH   AND    ITS   ORIGIN 


I 


I 


to  quench  thirst,  but  neither  of  them  has  the  attribute 
which  would  make  it  a  form  of  wealth,  namely, 
specific  importance.  Particular  parts  of  the  supply 
may  be  lost  with  impunity. 

Varieties  of  Utility.  —  We  have  used  the  term 
importance,  rather  than  usefulness  or  utility,  to 
describe  the  quality  which,  if  it  exists  in  every 
particular  bit  of  a  substance,  iiiakes  it  all  a  form 
of  wealth.  With  due  care  we  may  use  the  term 
utility.  In  a  way  even  a  cup  of  water  dipped  by 
a  fisherman  from  the  lake  is  useful,  for  it  renders 
a  service.  Though  the  man  might  lose  it  and  be 
no  poorer,  he  cannot  say  that  the  thing  has  no  utility 
of  any  kind.  He  can  say  that  it  has  no  importance. 
What  it  has  we  may  call  absolute  utility,  or  the 
power  to  do  for  a  man  something  which  he  wishes 
to  have  done.  When  the  fisherman  is  thirsty  the 
water  will  do  him  good.  It  has  an  absolute  service- 
rendering  power;  and  yet  this  cupful  makes  the 
owner  no  better  off  than  he  would  be  without  it, 
since  the  service  which  it  is  capable  of  rendering 
would  be  rendered  whether  the  man  had  it  or  not. 
Absolute  utility  in  an  article  is  the  power  to  render 
any  service  whatever,  regardless  of  the  question 
whether  it  would  be  rendered  equally  well  if  the, 
article  were  absent.  If  conditions  were  such  that  i 
the  man  would  have  to  go  thirsty  in  case  he  spilled 
his  cupful  of  water,  then  this  little  supply  would 
have  what  we  may  term  elective  utility,  and  this, 
means  that  the  presence  oftne  patttcuTar  bit  is  a 
positive  clemeii^tjn  conducing  to  the  man's  welfare. 
Usable  things  have  absolute  utility  even  when  they 
are  superabundant,  but  .they  have  effective  utility 
only  when  the  quantity  of  them  is  so  limited  that 


«  ESSENTIALS   OF   ECONOMIC   THEORY 

every  particular  bit  of  it  is  of  some  importance. 
Absolute  utility  and  limitation  of  supply  insure  to 
them  this  quality;  and  this  principle  holds  true  in 
the  economy  of  the  most  primitive  state  as  well  as 
in  that  of  a  civilized  one. 

The  Origin  of  Wealth. -Some  of  the  things  that 
have  this  kind  »  of  utility  have  been  given  to  man  by 
nature.  She  has  furnished  some  materials  that  are 
useful  and  has  not  furnished  them  in  quantities 
sufficient  to  prevent  them  from  being  specifically 
important.    On  account  of  the  comparatively  nig- 

'The    term    final    utility  's    used    with    much    the    same 
significance  as  specific  importance.     It  is  the  utility  of  the 
Mt  and  least  important  part  of  the  supply,  and  the  use  of 
the  term  requires  us  to  think  of  the  supply  as  offered  to  users 
umt  by  umt  till  the  whole  amount  is  in  their  hands.    The 
&Tst  unit,  when  it  stands  alone,  is  more  important  than  any 
ater  one  will  be.    The  second  is  of  less  consequence,  and  the 
last  18  the  least  important  of  all.     When,  however,  all  have 
been  supplied  and  are    together  available  for  use,  one  is  as 
important   as   another.     Each    one    has   an    effective    utility 
which  IS  measured  by  the  service  rendered  by  the  last  one 
The  term  spectfic  indicates  that  we  measure  the  importance 
of  the  supply  of  an  article  not  in  its  entirety,  but  bit  by  bit. 
whi  e  the  term  rffective  is  the  antithesis  of  absolute  and  means 
tnat  each  bit  of  the  supply  not  only  renders  an  absolute  ser- 
Z^H  H     '^°^"\""°  ^'h'ch  would  not  be  gratuitously  ren- 

tZr/  '"T  °*^."  P^""'  °^  '^'  '^"PP'y  •"  '^'^  this  lirtion 
were  removed  or  destroyed.  We  do  not  here  think  of  the 
supp  y  as  built  up  from  nothing  to  its  present  size  bit  by  bit. 
but  look  at  It  as  it  stands  and  measure  the  importance  of 
any  particular  quantity.  V/hen  we  speak  of  final  utility, 
Tnd  in  th  '  """Z:'  "'"'"'•''"^^"ts"  supplied  one  after  another 
le.^;^  '  r'  *^'  '''"^^'^««^<'  increments  become  less  and 
ess  important  since,  after  some  have  been  supplied,  the  want 
of  the  kind  of  good  that  they  represent  is  less  keenly  felt 

Llatinron'""-;!  '''  •""■''  "'  ""'*^  ''  '"^'•^'y  ^  --"«  of 
1T.Z    "°7n;t.froni  a  total  number  and  obtaining  a  mental 

Ti:.  "'  ''T'.portanee  which  correspond,  with  the 

effective  importance  of  any  unit  in  the  entire  quantity 


.E^^::^ 


WEALTH   AND   ITS   ORIGIN 


9 


i 

-is 
I 


gardly  way  in  which  she  has  doled  them  out  to  man, 
every  bit  of  the  supply  has  a  power  to  benefit  him ; 
and  if  he  gains  some  portions,  he  goes  upward  in 
the  scale  of  well-being,  and  if  he  loses  some,  he  goes 
downward.  Wild  fruits  and  fruit  trees  come  in 
this  category;  and  a  savage  who  should  build  his 
hut  in  a  small  grove  of  banana  trees,  if  he  could  keep 
other  people  out  of  it,  would  be,  by  so  much,  better 
off  than  they.  The  grove  and  its  fruits  would  con- 
stitute their  owner's  wealth. 

Land  an  Original  Form  of  Wealth.  —  Land  is  the 
oT-.ginal  gift  of  nature  to  humanity,  and  wherever 
i,i.ere  are  people  enough  to  make  the  possession  of 
a  particular  piece  of  it  important,  it  becomes  a  form 
of  wealth.  It  can  be  valueless  only  when  population 
is  very  sparse;  and  then  an  increase  in  the  number 
of  people  dwelling  on  it  gives  to  it  early  the  attri'  te 
of  specific  importance.  The  land  that  is  acccb.-.  le 
to  a  growing  population  cannot  long  be  superabun- 
dant. 

Forms  of  Wealth  produced  by  Labor.  —  Few  useful 
goods  are  presented  to  man  by  nature  in  a  finished 
state,  and  it  is  therefore  necessary  for  man  to  exert 
himself  in  order  to  get  the  goods  that  he  needs  in 
the  condition  in  which  he  can  use  •.  m.  lie  must 
make  raw  substances  more  usf^ful  than  the^  naturally 
are,  and  as  he  does  this  the  things  become  partly 
products  of  his  labor.  Of  course  the  supply  of  them 
is  limited,  since  labor  is  so. 

Labor  a  Wealth  Creator.  —  Labor  is  a  wealth-crcat-  /" 
ing  effort,  and  there  is  no  labor  that  is  successful  in  / ' 
attaining  its  purpose  that  does  not  help  to  brinffi  • 
into  a  serviceable  condition  something  that  can  bej 
'  identified  as  an  economic  good  or  a  form  of  wealth.' 


iiii\Mm^mk  rLiiyji.v^i-)jrigg 


10 


ESSENTIALS  OF  ECONOMIC  THEOBY 


and    therefore    produces   nothing.     We    mav    h,„U 
a  machine  that  wiU  not  work,  'or  make  a'produ" 
that  no  one  want,;  but  lalar_that  attains  a  mtiona 
purpose  ,s  always  economically  productive. 

tot     "'"'      r'^''"  """^   •*  <^'^«'   according 
avitram"""  *'"*  "  accomplishes,    if 
^M  to    he"  '^"""\8--''^<'  i"  o"'  illustration  is 
wealth  to  the  savage  who  resides  in  it,  we  had  fo 
msert  the  proviso  that  he  is  able  to  keep  Ither  per! 
sons  out  of  ,t.    Exclusive  possession  or  owneXn 
.s  nccessaT,  m  order  that  things  m»y  continue  t7^ 
eff  ct,vely  useful  to  any  particular  peraon  or  pci^onT 
I    hey  are  superabundant,  as  we  have  see„,~ 
of  the  supply  ,s  .mportant;  but  it  is  also  true  that  \f 
they  are  scarce  and  a  man  is  not  able  to  keep  anv  o 
hem,  they  will  „„t  serve  him.    I„  order  'that' an 
economic  g«Ki  may  be  effective,  it  must  be  apprc^ 
pnable,   and   where   claimants  are   nume  ou,  and 
lawless  It  may  take  much  of  the  owner's  time  and 
effort  to  keep  the  article  in  his  possession.    The 

ox  ent  the  civihzed  man  must  do  so;  for  however 
well  policed  a  city  may  be-,  it  will  not  do  toTeave 
pu^es  or  portable  go„,s  by  the  wayside.     ProtectI 

met  ^rT'',  f,  "'  ''"«'''  "'  '"^l  "dvance- 
ment     I„  cy.hzed  hfe,  mde.,1,  we  .lelegatc  much  of 

t  to  a  specal  chs.,  of  persons,  -  policemen,  judges 
awyers,  and  lesLslators,  -  and  this  is  the  S 
undamental  division  „f  ,„b„  ,,,t  ^^^^       »' 

ads  but  the  «ork  has  to  be  done  in  any  stage  of 
«oc,al  evolution.  Crusoe'.,  goods  would  have  been 
worth  nothing  to  him  if  he  could  not  have  kept  them 


§:mmMmm^M'»,^^<i^^^^mm§.:^^. 


WEALTH   AND   ITS   ORIGIN 


11 


from  the  savages  who,  in  time,  appeared  on  his  island; 

and  they  would  have  been  worth  Uttle  if  he  had  been 

forced  to  spend  most  of  his  time  in  guarding  them. 

Apprppriability  is,  therefore,  a  further  essential 

attribute  of  the  things  which  can  make  particular 

men  rieher  by,  reason  of  their  presence.    When  such 

I  things   are   actually  brought   into   ownership,  their 

I  utilities  become  available,  as  they  would  not  other- 

I  wise   be.    Effort   expended   in   protecting  property 

I  is  wealth-creating,  sioce  it  causes  those  service-ren- 

I  dering  powers  which  otherwise  would  be  only  poten- 

I  t'al  in  goods  to  become  active.     In  other  words,  it 

^  gives  to  things  which  are  otherwise  in  a  condition 

to  be  effectively  useful  a  further  quality  which  they 

require  in  order  that  they  may  actually  promote 

an  owner's  well-being. 

Industrial  Laftor.  —  Induatrjal  labor  is  the  antithe- 
sis of  protective  labor,  and  it  invariably  changes 
the  qualitiea  of  material  objects  in  such  a  way  as  to 
make  them  useful ;  that  is  to  say,  it  directly  creates 
"tiiities.'  These  utilities  are  of  different  kinds,  and 
the  labor  may  be  clasf='ified  according  to  the  kind 
it  creates. 

Elementary  Utility. —  An  elementary  utility  is 
created  when  a  substance  is  either  dug  out  of  the 
ground,  as  is  done  in  mining,  or  when  it  is  se- 
cured through  the  vital  forces  of  the  earth,  as  is  done 

'  The  term  create  is  here  used  in  a  somowhat  loose  sense 
and  does  not  imply  that  the  man  originates  matter  or  even 
that  he  always  transforms  it  without  calling  in,  as  an  aid 
the  forces  of  nature.  The  farmer  must  depend  on  vital  forces 
m  sod  and  air  in  order  tf)  raise  a  crop.  What  he  and  other 
lahorers  do  is  to  o^„5^  fh.-  product  in  :.;mc  way  to  ,.nu^  into 
existence,  and  he  and  they  may  in  this  sense  be  said  to  create 
the  products  which  would  not  appear  without  them. 


m^^\ 


N 


If 


12 


ESSENTIALS   OF   ECONOMIC  THEOPY 


m  agriculture.  Hunting,  fishing,  and  stock  raising 
should  be  classed  with  agriculture,,  since  they  use 
the  resources  of  animate  nature  to  secure  for  man- 
kind nev/  raw  products  on  which  labor  will  confer 
further  useful  qualities.  This  utility  has  to  be 
created  by  men  in  every  stage  of  industrial  develop- 
ment, from  that  of  a  tropical  savage  to  that  of  men 
in  the  most  advanced  civilization.' 

Form  Utility. -A  form  utility  is  created  when 
a  raw  material  is  fashioned  into  a  new  shape,  sub- 
divided, or  combined  with  other  materials,  as  is  done 
m  manufacturing  and,  in  a  certain  way,  in  commerce. 
Buying  goods  in   bulk  and  selling  them   in  small 
quantities  is  the  creating  of  form  utilities  and  makes 
an  addition  to  total  wealth.    Oil  in  small  cans  is 
worth  far  more  for  consumption  than  it  would  be 
if  each  consumer   were    forced    to    buy  a   tankful. 
Sugar  is  worth  more  to  a  consume-  when  it  is  doled 
out  to  him  in  paper  sacks  than  it  would  be  if  it  were 
to  be  had  only  in  hogsheads.     Merchants  are  not 
mere  exchangers,  for  they  make  positive  additions 
to  the  utility  of  goods.    In  primitive  life  no  such 
class  exists;  and  yet  form  utilities  of  every  kind  are 
created,  since  men  make  for  themselves  the  goods 
that  they  use  and  adapt  them  in  shape  and  in  quantity 
to  their  current  needs. 

Phce  Utility. -Carrying  things  to  places  where 
they  become  more  useful  creates  place  utilities.    In 

•  The  distinction  between  clemrntury  utility  and  others 
does  not  need  to  be  applied  with  the  utmost  strirtness  <or 
mmmp  ereates  form  utility  by  breaking  up  masses  of  ore.'and 
plaee  u  ,l.ty  by  making  them  aceessible,  A^rieulture  shapes 
Its  products  and  mnvos  then,  to  plaee=  of  .'-.raRe  It  i! 
convenient  in  practice  to  adhere  to  the  more  general  classi- 
fieation  suggested  in  the  text. 


^SSi'^i/r'W^^^M^^^^kM^^mm^'^^' 


WEALTH   AND   ITS   ORIGIN 


13 


primitive  life  men  do  their  own  carrying;  but  in 
civilized  states  the  common  carrier  does  most  of  it, 
and  so  imparts  place  utility  to  matter  on  the  most 
extensive  scale.  All  useful  transportation  creates 
this  quality,  which  is  a  general  attribute  of  wealth; 
and  the  operation  of  so  movin»^  matter  as  to  create 
place  utility  is  one  of  the  general  functions  of  labor.* 

Time  Utility.  — There  is,  moreover,  a  kind  of 
utility  which  depends  on  the  existence  of  a  goo«!  at 
the  time  when  it  is  needed.  Ice  in  the  warm  season, 
a  plow  in  the  spring  or  the  fall,  a  pleasure  boat  in 
summer,  and  anything  which,  by  the  aid  of  capital, 
is  presented  to  a  user  when  he  needs  it,  illustrate 
this  quality.  We  may  call  it  time  utility,  and  creat- 
ing it  is  a  function  of  capital.  We  shall  see  how 
capital  assists  in  the  production  of  the  other  utilities; 
but  the  creation  of  time  utility  it  accomplishes 
without  assistance. 

Executive  and  Directive  Labor.  —  Labor  involves 
the  whole  man,  physical,  mental,  and  moral.  No 
labor  is  so  simple  that  it  is  not  better  done  when 
intelligence  is  used  in  the  performance  of  it.  The 
savage's  hut,  his  canoe,  his  bows  and  arrows,  etc., 

'  In  a  way  all  kinds  of  production  may  be  analyzed  into 
the  moving  of  matter.  In  cutting  up  raw  materials  a  manu- 
facturer moves  waste  portions  away  from  those  that  arc  to 
be  utilized,  while  combining  materials,  of  course,  moves  them 
toward  each  other.  Neither  of  the.se  operations  creates  place 
utility.  This  quality  consists  in  a  relation,  not  between  some 
materials  and  others,  but  between  goods  and  the  persons 
who  are  to  use  them.  Bringing  things  to  us  from  a  distance 
changes  their  local  relation  to  us,  and  in  this  is  the  essence 
of  place  utility,  and  every  article  that  we  use  must  have 
acquired  this  quality.  The  .'■ervire  rendr^rir.g  power  which 
it  possesses  is  only  potential  until  it  reaches  a  place  where 
the  power  can  be  exercised. 


14 


ESSENTIALS  OF   ECONOMIC  THEORY 


vary  in  their  efficiency  and  value,  not  merely  accord- 
ing to  the  time  and  muscular  effort  spent  in  making 
them,  but  also  according  to  the  efficiency  of  the 
thought  by  which  those  efforts  are  guided.  There 
is  here  the  germ  of  the  difference  between  the  exec- 
utive labor  of  the  modern  employee  and  the  directive 
labor  of  the  manager.  Yet  no  manager  directs  in 
more  than  a  general  way  the  muscular  movements 
of  his  subordinates,  and  their  own  intelligence  must 
still  be  trusted  to  do  much  of  the  directing.  The 
mental  labor  that  guides  and  controls  the  physical 
is  universal  in  industry,  but  becomes  more  and 
more  a  distinct  and  dominant  factor  as  civilization 
increases. 

Fidelity  as  affecting  the  Productivity  of  Labor. — 
The  fact  that  all  workmen  are  largely  their  own 
directors  brings  fidelity  into  the  foreground  as  an 
element  in  determining  men's  earning  power;  but 
this  element  counts  for  much  more  in  the  civilized 
state  than  it  does  in  the  primitive  one,  for  here 
fidelity  in  directive  laborers  of  the  highest  type  is 
most  important  and  difficult  to  secure.  One  of 
the  greatest  problems  of  modern  business  is  how  to 
make  directors  and  executive  officers  of  corpora- 
tions faithful  to  the  stockholders  who  employ  them. 
In  the  primitive  state  these  problems  do  not  arise. 
When  a  man  is  working  for  himself,  mere  interest 
largely  takes  the  place  of  fidelity.  If  to-day  any 
one  secures  a  good  house  of  his  own  to  live  in,  it  is- 
because  he  employs  contractors,  overseers,  and 
arti>;ans  all  of  whom  are,  in  the  main,  faithful  to 
his  interests  and  see  that  the  work  of  building  is 
properly  done.  A  savage  looks  after  his  own  inter- 
ests as  his  personal  worjc  proceeds;    and  yet  even 


lyv    ATT" 


f^f^iS* 


WEALTH   AND   ITS   ORIGIN 


15 


in  his  case  there  is  the  germ  of  that  enthronement 
of  character  in  the  supreme  place  which  is  the 
prominent  feature  of  highly  organized  industry.  In 
building  a  hut  to  shelter  his  family,  a  savage  puts 
into  his  work  conscience  and  affection  as  well  as 
muscular  effort;  and  when  the  mother  of  the  family 
does  this  work,  the  altruistic  element  in  it  is  still 
more  conspicuous.  As  society  becomes  highly  or- 
ganized the  importance  of  the  moral  element  in  all 
labor  increases  till  the  further  progress,  or  even  the 
existence,  of  the  social  order  may  be  said  to  depend 
on  it.  In  the  world  of  business  there  is  now  distrusts 
and  turmoil,  and  revolutions  are  feared,  because  ofj 
the  unfaithfulness  of  a  class  of  men  to  trusts  com-| 
mitted  to  them.' 

The  Requisites  of  Production.  —  If  we  start  with 
nothing  but  the  earth  in  its  natural  state,  inhabited  by 
empty-handed  men,  and  seek  to  know  what  is  neces- 
sary in  order  that  some  wealth  may  be  created, 
we  find  that  nothing  is  absolutely  necessary  except 
labor.  3y  working  for  a  few  minutes  it  is  possible 
to  get  something  that  will  minister  directly  to  wants. 
Yet  if  men  begin  operations  in  a  state  of  such  poverty 

'  On  the  ground  of  convenience,  we  may  classify  labor 
as  physical  or  mental,  according  as  the  work  of  muscle  or  of 
bram  is  especially  prominent.  Digging  a  ditch  requires  more 
than  an  average  amount  of  strength  and  not  even  an  average 
amount  of  intelligence,  and  it  is,  therefore,  physical  labor 
rather  than  mental;  while  writing  a  brief  cr  -guing  a  case 
in  court  requires  much  power  of  thought  and  only  a  smfll 
amount  of  muscular  strength,  and  is  typically  mental  labor. 
Managing  an  estate  for  an  absent  owner  is  more  largely  a 
moral  function,  since  the  value  of  the  service  depends  chiefly 
on  the  fidelity  of  the  man  who  renders  it;  but  piiy.^icai  and 
intellectual  labor  are  also  involved.  These  three  types  of 
personal  eflfort  are  exerted  wherever  wealth  is  created. 


njr?us>jfr^r  ■■-.«, 


16 


ESSENTIALS   OP   ECONOMIC   THEORY 


I  I 


that  they  have  only  their  bare  hands  to  apply  to 
the  elements  about  them,  they  do  not  commonly 
get    the    usable   goods   immediately.    If   a   savage 
wants  fish  and  makes  the  rudest  net  with  which  to 
catch  them,  he  makes  what  is  a  capital  good.    This 
is  wanted  only  for  the  sake  of  the  consumers'  wealth 
which  it  will  help  to  produce.     The  end   in  view 
has  all  the  while  been  fish ;   but  the  man  works  first 
on   an   instrument   for  catching  them.     He   makes 
the  net  by  mere  labor,  but  he  catches  the  fish  by 
means  of  labor  and  the  net.    Without  such  instru- 
ments to  aid  in  production  a  dense  population  could 
not  live  at  all,  and  a  very  sparse  one  could  live  only 
in  a  meager  and  precarious  way.     If  the  instruments 
are  artificially  made,  or  if  they  are  furnished  by 
nature  in  limited  amounts,  they  are  forms  of  wealth, 
or  goods;    but  as  their  function  is  not  to  minister 
directly  to  consumers'  wa-its,  but  to  help  in  making 
things  which  do  this,  we  distinguish  them  by  the 
name  "producers'  goods"  or  "capital  goods."     In 
contrast   with   them   those   commodities   which   di- 
rectly minister  to  wants  may  be  called  "consumers' 
goods." 

The  Production  of  Intermediate  Goods.  —  All  eco- 
nomic goods  are  means  to  an  end.  Wealth  is  always 
mediate.  It  is  usually  a  connecting  link  between 
man's  labor  and  the  satisfiiction  of  his  wants.  Man, 
the  worker,  first  spends  himself  on  nature,  and  then 
nature  in  turn  spends  itself  on  him.  In  production 
nature  is  the  recipient,  but  in  consumption  the  re- 
cipient is  man.  This  is  saying  that  man  serves 
himself  by  means  of  some  element  in  nature  which, 
under  his  manipuktinn,  bf^comes  a  form  of  wealth.' 
He  thrusts  a  bit  of  natural  matter  between  himself 


WEALTH    AND    ITS   ORIGIN 


17 


as  a  producer  and  himself  as  a  ronsumer.    All  kinds 
of  wealth,  then,  stand  in  an  intermediate  position 
between   original   labor   and   the   gratification   that 
ultimately  results  from  it.     Some  goods,   however, 
are  means  in  the  special  sense  of  standing  between 
labor  and  other  goods.     Instruments  help  to  make 
consumers'  goods  and  these  add  to  man's  pleasure. 
Using  a  tool  is  not  generally  agreeable.    The  tool 
stands  not  only  between  the  elTort  and  the  gratifica- 
tion that  will  ultimately  follow,  but  between  the 
effort  and  f'c  further  material  good  that  will  di- 
rectly   produce    gratification.     The    hatchet    inter- 
venes between  the  labor  that  makes  it  and  the  fire- 
wood it  will  cut,  while  the  wood  acts  directly  on 
the  man  and  keeps  him  warm.    Capital  goods  are 
in  this  special  sense  mediate.     They  are  not  wanted 
for  their  own  sake,  but  for  the  sake  of  something 
else  that  is  directly  useful.* 

All  Labor  immediately  Productive  of  Wealth.  — 
When  a  savage  abantlons  the  plan  of  fishing  from 
the  shore  and  gives  his  labor  for  a  fortnight  to  mak- 
ing a  canoe  with  which  to  fish  more  effectively,  he 
interposes  an  interval  of  time  between  his  labor 
antl  its  ultimate  fruits,  the  consumers'  goods.  There 
is  no  such  interval  between  the  labor  and  the  kind 
of  wealth  that  it  first  creates,  namely,  the  canoe. 
This  inunediate  product  of  labor  is  itself  a  form  of 
wealth  and  at  once  rewards  the  laborer,  since  it  is 
what  he  needs,  though  he  iloes  not  need  it  for  con- 
sumption.    Industry   always   pays   as   it   goes   and 

'  For  an  elaboration  of  the  conception  of  mediate  goods 
the  rcadf-r  is  nfirrcd  to  Von  Bohm-BawcTk's  work  on  "Positive 
Theory  of  Capital  "  and  to  John  Rae's  work  on  "  The  Sodologi- 
CM  I  Theory  of  Capital." 


'^m 


'ioir^; 


18 


ESSENTIALS   OF  ECONOMIC  THEORY 


tolerates   no  hiatus   between  labor  and   wealth   in 
eoine  form. 

Organized  Industry  immediatehj  Productive  of  Con- 
S7n)wrs'  G'oot/.v.  —  If  one  man  wore  kecpinf^  the  stock 
of  canoes  of  a  few  fishermen  in  repair  and  taking 
a.s  iiis  pay  a  share  of  each  day's  catch,  he  would  not 
have  to  wait  for  his  food  any  longer  than  the  fisher- 
men   themselves.     This    mode    of    conducting    the 
industry,   however,   involves   organization      'f  each 
fisherman  had  to  make  his  first  canoe,  it  would  be 
necessary  for  him  to  wait  for  fish;    but  as  soon  as 
a  stock  of  canoes  has  been  obtained  and  a  special 
set  of  men  assigned  to  the  work  of  keeping  tl.is 
stock  intact  in  number  and  quality,  that  necessity 
entirely    ceases.     Five   men    may    do    nothing    but 
fish  while  a  sixth  keeps  their  stock  of  canoes  intact 
ly  repairing  old  ones  left  on  the  shore  and  making 
new  ones  to  replace  sr       as  are  beyond  repairing. 
P'ishing  and  boat  building  may  go  on  simultaneously, 
and  all  the  men  may  go  share  and  share  in  each  day's 
catch.'    This  is  a  type  of  what  goes  on  ii.  inodern 
industry,  where  a  complex  stock  of  capital  goods 
always  exists  and  is  kept  intact  by  the  action  of 
a  class  of  persons  who  share  the  returns  that  come 
from  using  the  stock.     None  of  these  persons  has 
to  wait   for  food,   although  some   of  them   devote 
themselves  exclusively  to  the  production  of  tools. 
This  fact  shows  that  the  necessity  for  waiting,  as 
well  as  working,  wherever  instruments  are  in  the 
process  of  manufacture,  is  not  among  the  universal 

'  One  man  might  be  employed  in  guarding  canoes  and 
fish  against  theft,  which  is  doing  protective  rather  than  in- 
tiu.s'ri.ii  iaDor;  and  c-conoriiic  lurtt-»  wmiid  (end  to  give  him 
a  share  a.s  large  as  each  of  the  others  receives,  provided,  of 
course,  that  the  men  arc  of  equal  capacity  as  workers. 


i 


WEALTH   AND    ITS   ORIGIN 


19 


phenomena  of  eronomics,  and  that  it  is  not  present 
in  that  organized  inthistry  which  we  chiefly  study. 
Such   a  permanent   stock   of  capital  goods  as  the 
fishing    comnmnity    of    ou--    illustration    possesses 
would  enable  it  to  get  its  food,  the  fish,  day  by  dny, 
by  working  in  different   ways  and  using  the  per- 
manent stock.     If  we  call  this   permanent  supply 
of  canoes,  etc.,  capital,  it  is,  in  a  cauml  way,  mediate 
wealth,  though  it  is  not  so  in  point  of  time.    Some 
labor  is  spent  each  day  on  it,  and  itself  creates  each 
day  some  consumers'  wealth.     These  two  operations 
go  on  simultaneously,  and  the  men  who   work  to 
maintain  the  stock  and  those  who  use  it  get  their 
returns  together.     In  very  primitive  life  the  work 
spent  on  capital  goods  and  that  spent  on  consumers' 
goods  are  not  always  synchronous,  but  organization 
and  the  acciuiring  of  a  permanent  fund  of  capital 
make  them  so.     Work  to-day  and  you  eat  to-tlay 
food  that  is  a  consequence  of  the  working.     In  point 
of  time  tlie  canoe  makers  are  fed  as  promptly  as 
the  fisluniien,  and  this  ffict  is  duplii  ;^,!..J  in  every 
part  of  the  industrial  system.     Wo  shall  later  see 
more  fully  what  this  signifies,  but  it  is  clear  that 
any   study   of  this   phenomenon  —  the   synchroniz- 
ing of  labor  and  its  reward  —  takes  us  out  of  the 
field  of  Universal  Economics,  since  it  does  not  appear 
in  the  industrj'  of  primitive  beginnings,  but  is  the 
fruit  of  organization.' 

'The  concpption  ot  capital  goods  as  alwa^  s  putting  en- 
joyments into  the  future  lias  crept  into  economic  science 
because  m  certain  illu.strations  t.^Ken  from  primitive  life  they 
.-eem  to  have  that  effect.  We  shall  see  that  they  do  not  have 
It  at  aii  111  viatic  »<o(:iai  industry,  and  that  thry  have  it  only 
ni  a  limited  way  in  dynamic  social  industry,  or  that  which  L 
earned  on  by  a  society  undergoing  organic  change. 


CHAPTER  II 

VARIETIES   OF   ECONOMIC   GOODS 

Passive  Capital  Goods.  —  Labor  spends  itself  on 
materials,  and  these,  in  their  rawest  state,  are  fur- 
nished   by   nature   herself.    They    "ripen"    as   the 
work  goes  on.     Every  touch  that  is  put  on  thcM 
imparts  to  them  more  of  the  utility  which  is  the 
essence  of  wealth.    They  are  technically  "goods," 
or  concrete  forms  of  wealth,  from  the  moment  when 
they  begin  to  acquire  this  utility,  though  for  a  time 
they  arc  in  an   unfinished  state.    The  function  of 
materials,   raw   or  partly   finished,   in  the  physical 
operation  of  intlustry  is  a  pa.'isive  one,  since  they 
receive  utility  and  do  not  impart  it.    The  iron  is 
passive  under  the  blows  of  the  blacksmith's  hammer; 
leather  ' .  passive  under  the  action  of  the  shoemaker's 
sewing  machine;    a  log  is  passive  under  the  action 
of  the  lumberman's  saw,  etc.    The  materiab  whichj 
are  thus  receiving  utilities  under  the  producers'  ma- 
nipulations constitute  a  distinct  variety  of  capital' 
goods,  while  the  implements  which  help  to  impart 
the   utilities   constitute   another  variety,   and   bothi 
kinds  are  present  in  all  stages  of  industrial  evolution.^ 
Savages  use  raw  materials  and  tools  for  fashioning 
them. 

Active  Capital  Goodie.  —  The  hammer  which  fash* 
ions  the  iron,  the  awl  which  pierces  the  Ic '''.er,  and 
the  saw  that  cuts  the  log  into  boards  hav      .  activfe 

20 


in 


VARIETIES    OF    ECONOMIC    GOODS 


21 


function  to  perform.    They  do  not  receive  utilities, 
but   impart   them.    They   manipulate   other   things 
and  are  not  themselves  manipulated;    an<l  except 
as   unavoidable    rr-   Hn.i    t'-ar   injure   or   destroy 
them,  th(>y  are  i  )t   themselves  at  all  changed  by 
the  proc(>sses  in    .hi,   they  ttke  nart.    They  are 
the  workman's  act.vc  asrifrts  m  the  attacks  that 
he  makes  on  the  resisting  elements  of  nature.     Pas- 
sive  instruments,    then,    and    active    ones  —  things 
which  receive  utility,  as  industry  goes  on,  and  those 
which   impart   utility  —  constitute  the  two  generic 
kinds  of  capital  goods.     What  is  commonly  called 
"circulating  capital"  is  a  permanent  stock  of  passive 
capital  goods;  and,  in  like  manner,  what  is  usually 
known  as  "fixed  canital"  is  sucl<  a  stock  of  capital 
goods  of  the  activo  kind.     The  materials  and  the 
unfinished  goods  that  are  scattered  through  a  modern 
mill  and  receiving  utility  are  what  the  manufacturer 
would  at  this  moment  identify  if  he  were  asked  to 
point  out  the  things  in   which   he   has  circulating 
capital    invested;    while    the    mill,   the    machinery, 
the  land,  etc.,  which  are  imparting  utility,  are  what 
he  can  point  to  as  now  constituting  his  fixed  capital. 
At  a  later  time  there  will  be  other  goods  of  both 
kinds  in  his  possession,  ami  these  will  at  that  time 
embody  the  two  kinds  of  capital.      While  a  primi- 
tive man  would  have  little  occasion  to  use  the  term 
cajnlal  goodx,  he  would  possess  both  varieties  of  the 
goods  which  the  term  denotes. 

Varieties  of  Active  Capital  Goods. —  More  hand 
tools  act  as  armatures  attached  to  the  person  of 
the  worker,  and  they  enable  him  effectively  to 
attack  resisting  substances.  The  hammer  fortifies 
the  blacksmith's  hand  against  the  injuries  it  would 


22 


ESSENTIALS    OF    ECONOMIC    THEORY 


suffer  if  he  delivered  blows  with  his  fist,  and  it  multi- 
plies the  efficiency  of  the  blows.    Machines,   how- 
ever, substitute  themselves  for  the  person   of  the 
worker  and  carry  the  tool  through  its  movements. 
A  steam  hammer,  so  called,  is  an  engine  that  gets 
power  from  a  boiler  and  wields  an  armature,  which 
is  the  real  hammer,  much  as  a  smith  would  do  it, 
though  with  far  greater  force  and  effect.     Machines 
do  rapidly  and  accurately  what  a  manual  laborer 
would,  without  them,  have  to  do  slowly  and  im- 
perfectly, by  carrying  the  armature  in  his  own  hand 
and  moving  i;,  by  his  own  muscular  strength.     Tools 
and  machines  impart  "form  utility"  to  materials. 
Vehicles  which  carry  goods  impart  "place  utility" 
to  them  by  putting  them  where  they  are  more  use- 
ful than  they  would  be  elsewhere.     Buildings  pro- 
tect goods  and  workers  alike,  and  enable  the  opera- 
tion  of  transforming  them   tu   go   on   successfully. 
They  also  make  it  possible  >o  store  goods  at  a  time 
when  they  are  not  needed  and   take  them  out  for 
use  when  they  are  needed.     In  doing  this,  buildings 
help  to  impart  "time  utility"  to  the  merchandise 
that  is  put  into  them  by  keeping  them  intact  till 
the  time  comes  when  they  will  be  useful.     Tools, 
machines,    r(>servoirs    of    water,    canals,    roadways, 
buildings,   and   even   land   itself  are   active   capital 
goods,  and  are,  for  that  reason,  com[)onent  elements 
of   that    part    of   the    permanent    productive    fund 
which  is  known  as  fixed  capital.     They  aid  workers 
in  their  efforts  to  bring  materials  into  usable  shapes, 
and  tliis  is  as  true  of  the  hole  in  the  earth  in  which 
a  savage  .stores  provisions   as  it  is  of    a    fireproof 
warehouse  in  a  modern  city. 

Materials  which  arc  at  first  Passive  and  later  f-a^R 


i 


VARIETIES   OF   ECONOMIC   GOODS 


23 


? 


I 


inlo  the  Active  '^late.  —  The  hammer  itself  has  to 
be  made  out  of  .aw  material,  and,  while  it  is  in  the 
making,  the  material  that  enters  into  it  is  as  passive 
as  anything  else.  While  the  ore  is  smelting  and 
while  the  steel  is  forging,  the  future  hammer  is  in 
a  preliminary  stage  of  its  existence  and  is  discharg- 
ing a  passive  function.  When  it  is  completely 
finished,  its  period  of  activity  begins,  and  from  this 
time  on  it  helps  to  manipulate  other  things.  The 
materials  which  enter  into  consumers'  goods  go 
through  no  such  transition.  The  leather  remains 
passive  till,  in  the  form  of  a  pair  of  shoes,  it  clothes 
its  user's  feet;  and  at  this  poin*^  it  ceases  to  be  a 
capital  good  at  all.  The  steel  of  the  hammer  is 
first  a  passive  good  and  later  an  active  one. 

The  Use  of  Capital  Goods  Universal.  —  There  is 
no  doubt  that  capital  goods  are  used  in  the  most 
primitive  industry.  Implements  existed  in  times 
too  remote  for  tracing;  and  even  if  they  had  not 
been  used,  raw  material  would  have  been  indis- 
pensable. People  living  in  an  economic  stage  so 
ultraprimitive  as  to  use  no  mediate  goods  whatever 
could  sustain  life  only  by  plucking  wild  fruit  or 
gathering  fish  or  other  food  stuff  by  hand,  and  so 
long  as  they  could  do  this  their  industry  might  con- 
ceivably consist  in  getting  consumers'  goods  by 
labor  only.  The  rudest  pick,  shovel,  or  ax  and 
the  simplest  hunting  implement  are  early  types 
of  what,  in  "capitalistic  production,"  is  represented 
by  mills  with  their  intricate  machines,  ships,  rail- 
roads, and  the  like.  Primitive  industry  has  capital 
but  is  not  highly  capitalistic,  since  labor  and  a  littK- 
capital  in  simple  forms  are  all  that  it  requires.  These 
primitive  capital  goods  are  still  essential. 


:♦ 


24 


ESSENTIALS    OF   ECONOMIC   THEORY 


Capital. —  It  might  seem  that  we  have  ahcady 
described  the  nature  of  capital,  but  we  have  not. 
We  have  described  the  kinds  of  goods  of  which  it 
consists.    A  sharp  distinction  is  to  be  drawn  between 
two  ways  of  treating  capital  goods,  and  only  one  of 
these  ways  affords  a  treatment  of  capital  properly 
-o  called.     To  attain  that  concept  we  must  think 
of  goods  as  in  some  way  constituting  a  stock  which 
abides  as  long  as  the  business  continues.     And  yet 
the  things  themselves  separately  considered  do  not 
abide.     Goods  are  perishable  things;    no  one  lasts 
forever,  and  some  last  only  a  very  short  time.     Raw 
materials  Ijest  serve  their  purjiose  when  they  are 
quickly  transformed   into   usable  goods  and  taken 
out    of    the    catv'gory    of    productive    instruments. 
Tools  may  last  longer,  but  they  ultimately  wear  out 
and  have  to  be  replaced. 

How    Capital    Goods    Originate    and    Perish. If 

you  watch  a  particular  mediate  good  of  th(>  passive 
kind,  say  wood  in  a  growing  tree,  you  see  it  begin- 
ning its  career  as  an  absolutely  raw  material,  and  then 
under  the  hand  of  labor,  aided  by  tools,  receiving 
utility  till  it  takes  its  final  form  in  some  article  for 
a  consumer's  use,  say  a  dining  table.  Little  labor 
is  applied  to  it  during  the  first  stage  of  the  process, 
that  in  which  the  tree  is  guarded  and  allowed  to 
grow  to  a  size  that  fits  it  for  conversion  into  lumber; 
but  the  cutting,  carrying,  sawing,  and  fashioning  are 
done  by  labor  and  tools,  and  under  their  manipu- 
lations the  wood  "ripens"  in  the  economic  sense 
—  that  is,  it  becomes  quite  fit  for  consumption. 
It  is  ready  to  serve  a  consumer  as  a  table,  and,  when 
this  service  begins,  the  wood  that  up  to  this  point 
has  been  a  passive  capital  good,  constantly  iccciv- 


VARIETIES    OF    ECONOMIC    GOODS 


25 


ing  utilities,  will  cease  to  be  a  capital  good  at  all 
and  begin  slowly  to  wear  out  in  the  service  of  its 
owner.' 

The  Transition  of  Goods  from  one  State  to  Another. 
—  The  beginning  of  its  service  in  the  purchaser's  / 
dinmg  room  takes  the  wood  of  the  table  out  of  the  / 
category   of  producers'   goods;    but   th.-re   is  ..omel 
raw  material  that  is  never  d(^stined  to  emerge  from' 
that  category  and  enter  another.     Its  last  state  of 
existence  as  a  good  will  be  that  in  which  it  is  em- 
bodied, not  in  an  article  for  consumers'   use,   but 
in  an  active  tool.     Our  tree  might  have  furn'ished 
some  of  its  wood  for  a  wheelbarrow,  and  if  so,  that 

•In    tho    economic    sense    consumption    is    the    utilization 
rather  than  the  destruction  of  the  tiling  eonsumeci,   though 
many  things  go  rapidly  to  destruction  in  the  process      Food 
IS  destroyed  in  the  moment  of  using;    clothing  perishes  more 
slowly  by  use,  and  furniture  and  dwellings  more  slowly  still 
Some   things   that   g<i   gradually   to   destruction    during    the 
process  of  utilization  do  not  perish  the  more  rapidly  because 
of  It.     A  vase,  a  statue,  or  a  picture  is  consumed,  in  the  ec- 
ononuc  sense,  by  a  person's  act  of  looking  at  it  and  getting 
pleasure  from  it;    but  this  does  not  hasten  its  deterioration 
except  as  keeping  such  an   ornament  where  it   can   be  seen 
exposes  it   to  deterioration   or  accident.     Climbing  a  hill  to 
get  a  view  "consumes"  the  hill  in  a  true  srnse,  and  locking 
from  the  summit  over  a  wide  str.-tch  of  pictur<-sc,ue  country 
even    consumes  -  that    is,     utilizes  —  the    landscape;      and 
certainly   this  act   does   not   injure    the   thing   utilized      The 
general  fact,  however,  that  goods  for  final  use  are    as  a  rule 
injured  or  destroyed  .>ither  by  the  act  of  consumption  or  by 
the  exposures  that  arc  incidental  to  it,  justifies  the  use  of  this 
term  to  express  the  receiving  of  a  service  from  the   usable 
article.     It  is  a  process  in  which  the  commodity  acts  on  men's 
Bcnsibihties  and,   as  a  general   rule,   exhausts  it.self  while  so 
doing.     It  is  worth  remembering  that  this  exhau.stion  of  the 
Rood  IS  not  the  essential  part  of  conumption.     On  the  man's 
side  that  consists  in  deriving  benefits  from  the  good,  while  on 
the  side  of  the  good  it.srif  it  cnpsists  {r,  pppf,,....;.,-  u^..„c*  -^ 
Ui"  man  —  in  doing  liim  good  and  not  in  doing  itself  harm. 


26 


ESSENTIALS   OF   ECONOMIC  THEORY 


part  of  it  would  have  been  a  capital  good  until  it 
ceased  to  be  an  economic  good  at  all.    If  we  watch 
it  as  it  grows  toward  its  economic  maturity,  we 
see  it  sawed,  planed,  and  otherwise  fashioned  under 
the  laborer's  hand,  and  maintaining  during  all  this 
time  its  passive  attitude,  just  as  does  the  wood  that 
is  destined  to  constitute  a  table.    When  the  wheel- 
barrow  is   completed,  it   does   not,   like  the   table, 
begm    to    minister   directly    to    consumers'    wants' 
but  begins  actively  to  aid  some  laborer  in  a  further 
productive    operation.     It    carries    mortar    to    the 
wall  of  an  unfinished  building  and  is  thus  taken 
out  of  the  list  of  passive  goods  —  recipients  of  utility 
—  and  is  ranged  with  other  .active  tools  which  im- 
part utility.     The  same  thing  is  true  of  the  steel 
that  IS  destined  to  compose  the  head  of  a  modern 
woodman's   ax  or  the  stone   that  is   in  process  of 
fashioning  into  the  rude  hatchet  of  some  primitive 
savage.    As  raw  or  partly  wrought  material  it  is 
a  passive  capital  good;    later  it  becomes  an  instru- 
ment of  the  active  sort. 

The  Ultimate  Perishability  of  all  Kinds  of  Goods 
artifinally  Made.  -  In  the  end  both  kinds  of  ma- 
terial will  ceppe  to  be  capital  goods.    The  raw  stuff 
that   goes   into   food,   clothing,   furnishings,  or   the 
hke  will   become  consumers'  goods,  while  the  raw 
material  of  tools  will,  in  its   final  form,  the   tools 
themselves,  have  one  more  lease  of  life  as  capital 
goods.     In    the    end,    however,    as    wheelbarrows, 
axes,   hatchets,  and  the   whole  long  list  of  active 
nnplements  are  used  up,  they  cease  to  be  capital 
goods  because  they  cease  to  be  economic  goods  at 
all.    They  are  as  truly  ordained  to  be  ultimately 
used  up  as  are  food  and  clothing,  and  this  is  true 


VARIETIES   OF    ECONOMIC   GOODS 


27 


of  the  most  durable  things  that  arc  artificially  made. 
Walls,  roadways,  bridges,  and  buildings  slowly  de- 
teriorate till  the  time  comes  when  for  productive 
purposes  their  room  is  worth  more  than  their  company. 
Why  the  Peruhability  oj  Capital  Goods  does  not 
put  Capital  out  of  Exidevce.  —  Perishability  is  the 
most  striking  trait  of  capital  goods.     Each  particu- 
lar one  comes  and  goes,  but  there  is  always  a  stock 
of  them  on  hand;    for  when  one  is  on  the  point  of 
going,  another  is  ready  to  take  its  place  and  keep 
up   the   succession.     New   tools    replace   old   tools; 
new  materials  replace  those  that  are  finished  and 
withtlrawn,  and  so  it  comes  about  that  a  stock  of 
such  things  abides  forever.     Not  one  of  the  individ- 
ual instrum(>nts  is    permanent,  for   each    one   only 
does  its  part  in  keeping  up  an  endless  procession. 
It  is  the  procession  that  is  always  there  —  a  moving 
series  of  individual  goods,  not  one  of  which  has  more 
than  a  transient  economic  career.     Each  one  helps 
to  keep  up  the  supi)ly  of  permanent  capital  just 
as  each  man,  taking  hi;--  turn  in  an  endless  succes- 
sion of  laborers,  serves  during  his  brief  life  to  keep 
up  the  permanent  force  of  laboring  humanitv.     Men 
come   and   go,   but   "labor"  — a   mass  of   working 
humanity  — abides;     and    so    capital    goods    come 
and  go,  but  a  stock  of  them  abides,  kept  up  by 
perpetual  replacement.     We  may  trace  the  career 
of  any  single  instrument  from  a  beginning  to  an  end ; 
but  we  may,  on  the  other  hand,  cease  to  look  at  any 
instruments  that   we  single  out   and   identify  and 
look  rather  at  the  procession  of  them;  and  if  we  do 
this,  we  look  at  a  body  which  never  wastes  away, 
though  the  things  that  compo.se  it  are,  separately 
considered,  forever  wasting. 


l 

I 
4 


28 


ESSENTIALS   OF    ECONOMIC   THEORY 


There  are  many  kinds  of  transient  things  which 
by  the  same  process  of  renewal,  constitute  permanent 
entities.    Composing  a  human  bo,iy  at  this  moment 
are  certain  tissues  that  can  be  separately  identified- 
and  If  we  watch  any  one  of  them,  we  shall  see  it  going 
in  a  short  time  to  .lestruction.     Y,.t  the  body  lasts 
while   he  continues.     Indeed,  the  evidence  of  the 
life  Itself  ,s  the  discarding  and  re,)lacing  of  the  tis- 
^nos.    A  living  body  is  a  durable  thing,  though  the 
particular  tissues   that  at   any  one  time   compose 
It  are  not  so.     In  a  like  way  drops  of  water  make 
a  rivvr,  and   this   is  a  permanent  thing,   however 
rapidly    its    composition    chang(.s.      The  waterfall 
that  drives  the  machincTy  of  a  mill  is  permanent 
though  no  particular  particle  of  water  remains  in 
1    for  more  than  a  moment.    Society  is  permanent, 
though  the  men  who  compose  it   are    short-lived 
m  an  exactly  similar  way  a  body  of  capital  goods 
IS    maintained    as    a    perpetual    instrumentality   of 
production.     This  is  capital  properly  so  called.     It 
iH,  as  ,t  were,  a  quasi-living  body,  perpetuated  by" 
the  constant  replacement  of  the  component  parts 
wluch  are  destroyed  as  its  normal  activities  go  on' 
The  Difference  between    Capital   Goods  and  Cajri- 
tal  Summarized.  ~  The  distinction   between  capital 
goods,  on  the  one  hand,  and  capital,  on  th-  other 
IS    then,  like  that   between   particular  tissues  and 
a  living  body,  or  like  that  between  particular  parti- 
cles of  water  in  the  river  and  the  river  that  flows 
forever.     AVo    can    single    out    and    watch    certain 
drops  of  the  water  as  they  flow  from  a  spring,  and 
we  can  ^  trace  them  through  their  brief  careers,  and 
suy  truly  that  the  river  is  composed  of  fickle  and 
transient  stuff;    but  we  cannot  say  that  the  river 


•^fvl*^ 


VARIETIES   OF    ECONOMIC   GOODS 


29 


is  transient.  That  is  perpotuated  by  the  renewing 
of  the  r,ui)ply  of  water  a.s  the  original  drops  dis- 
appear. We  can  mentally  watch  a  particular  man, 
as  he  enters  the  social  force  of  workmen,  labors 
for  a  time,  and  drops  out  of  the  line,  and  can  see  that 
society  is  composed  of  transient  material;  but 
society  itself  is  an  abiding  thing.  So  we  can  study 
a  particular  bit  of  ore  or  wool  or  leather  or  a  par- 
ticular hammer  or  spindle  or  sewing  machine,  and 
in  those  cases  we  shall  be  studying  capital  goods 
and  finding  how  perishable  they  are;  but  we  shall 
also  see  that  a  stock  of  them  always  abides  as  the 
capital  of  economic  society.  We  can  cease  to  look 
at  individual  things  and  study  the  permanent  fund 
of  productive  wealth,  which  is  made  up  of  goods 
like  ore,  wool,  leather,  hammers,  spindles,  and  sew- 
ing machines.  The  identity  of  the  things  which 
make  up  this  stock  is  forever  changing.  The  same 
list  of  things  we  shall  never  find  in  the  stock  on  any 
two  dates,  but  a  supply  of  similar  things  forever 
,  abides.  Capital  is  this  permanent  fund  of  productive 
goods,  the  identity  of  i  >m  component  elements  is 
forever  changing.  Capital  goods  are  the  shifting 
cmnponent  parts  of  this  permanent  aggregate.  They 
are  the  particular  instrum(>nts  that,  each  during 
its  own  brief  economic  lifetime,  take  their  places 
in  the  endless  procession  of  things  which  in  its 
entirety  is  an  abiding  productive  agent  —  the 
co-worker  of  labor  and  its  perpet  .al  assistant  in 
creating  consumers'  wealth. 

The  Business  Man's  Vieiv  of  Capital.  —  It  is  as 
such  an  abiding  .  ntity  that  a  business  man  regards 
capital.  He  tlescribes  it  nearly  always  as  a  sum 
of  money.    Thus  the  capital  of  a  manufacturer  is 


30 


ESSENTIALS   OF   ECONOMIC   THEORY 


"a  million  dollars"  because  a  stock  of  instruments 
worth  that  anjount  is  kept  intact  in  his  possession. 
It  is  not  allowed  to  waste  away,  however  much 
the  constituent  i)arts  of  it  may  shift.  The  waste 
and  renewal  which  business  entails  leave  the  ecjuiv- 
alent  of  the  million  dollars  always  on  hand,  thouj^h 
never  in  the  literal  shape  of  money.  A  stock  of 
shifting  goods  always  worth  a  million  tlollars  is,  by 
a  figure  of  speech,  described  as  a  million  dollars 
"invested   in  the  goods."  ' 

The  Chief  Altrihitte  of  Capital.  —  A  chief  attribute 
of  capital,  properly  so  called^  is  jienna^ience.  If 
a  man*s  productive  fund  does  not  la.st,  he  is  im- 
poverished. The  farm(>r  keeps  on  hand  a  more  or 
less  constant  supply  of  th'  implements  he  has  to 
use.  He  takes  a  part  of  the  proceeds  of  the  sale 
of  his  crops,  jjuts  it  into  the  shape  of  imph'ments 
and  materials,  and  in  this  way  keeps  an  amount 
of  them  on  Imiul  as  the  auxiliary  capital  of  agri- 
culture. Particular  goods  are  not  constant,  but  the 
sum  of   money  or  quantum  of  wealth  "invested" 

'  We  hrro  put  out  of  sight  all  questions  ronncftcd  with 
the  changing  purcha.sing  power  of  money.  This  is,  in  ordinary 
times,  the  business  man's  habit.  He  considers  his  capital 
intact  if  the  number  of  dollars  invested  originally  in  his  busi- 
ness still  appears  on  his  inventory  as  representing  the  net 
surplus  of  his  a.s.scts  over  his  liabilities.  If  a  currency  were 
undergoing  rapid  inflation,  a  fixed  amount  rf  invested  money 
would  icpresent  a  shrinking  stock  of  capital  goods.  This 
stock  would  la.st  always,  but  would  grow  smaller  by  a  true 
standard  of  measuromont,  .\11  that  we  are  at  present  irrter- 
estcd  111  knowing  is  that  practical  usage  treats  capital  as  a 
permanent  fund  of  productive  wealth,  and  most  conveniently 
describes  it  as  a  fixed  amount  of  money  "invested"  in  goods 
of  a  productive  kind.  VViiat  is  tiiougiit  of  as  "money"  abides. 
Of  course  the  practical  man  does  not  regard  it  as  actually 
composed  of  currency. 


1 


VARIETIES   OF    ECONOMIC    GOODS 


31 


V4^ 


in  the  moving  procpssion  of  thorn  is  so.  At  any 
one  instant  the  capital  is  composed  of  particular 
instruments  which  can  be  sought  out  and  identified, 
but  at  no  two  instants  are  the  goods  the  same. 

The  Reasons  for  describing  Capital  as  a  Sum  of 
Money.  -  This  fact  explains  the  general  practice  of 
describing  capital  in  terms  of  money.  The  manu- 
facturer just  referred  to  will  s{)eak  of  his  capital 
as  "a  million  dollars"  and  consider  that  sum  as  a 
"permanent  investment"  because  he  knows  that 
while  the  goods  that  now  represent  that  value  will 
soon  pass  from  him,  the  "dollars" — that  is,  the 
value  which  is  ecjuivalent  to  the  dollars  —  will 
abide.  There  is,  moreover,  no  failure  on  his  part 
to  discriminate  between  his  capital  and  literal  money, 
for  he  knows  in  what  his  productive  fund  consists, 
and  is  fully  aware  that  only  the  minutest  part  of  it 
is  in  the  shape  of  actual  currency. 

Instruments  of  production  compose  the  fund, 
but  the  dollars  serve  to  describe  it.  They  indicate 
the  amount  and  the  abiding  quality  of  it,  since  they 
describe  what  he  has  invested  or  embodied  in  the 
shifting  things  and  can,  by  a  fair  sale,  get  out  of 
them. 

Why  Abstract  Terms  are  used  in  popularly  de- 
scribing Capital.  —  In  certain  connections  money 
is,  in  unintelligent  thinking,  confused  with  real 
capital  in  ways  that  we  should  guard  against.  In 
avoiding  such  errors  we  need  to  be  even  more  careful 
that  we  do  not  miss  the  truth  that  is  at  the  basis 
of  the  common  mode  of  describing  capital.  A 
permanent  fund  that  is  spoken  of  as  a  million  dollars 
invested  in  a  business  does  not  suggest  to  any  one 
a  literal  pile  of  a  million  silver  or  paper  dollars  or 


32 


K88FNTIALS   OF    ECONOMIC   THEORY 


I 


of   a   hundu'd    thousand   gold   eaglos.     It   suggests 
wliat   is  actually   in   the   business,  a   procession  of 
things  each  of  which  conies  into  the  man's  posses- 
sion and  then  leaves  him,  and  helps  him  to  keep 
the  constant  stock  of  goods  that  at  any  time  is  a 
potential    million    of    dollars.     A    permanent    body 
of  any  kind,  if  it  is  made  up  of  shifting  tissues,  is 
commonly  descrilx'd  by  the  use  of  an  abstract  term, 
A  waterfall,  made  as  it  is  of  rapidly  changing  drops 
of  water,   is  spoken  of  as  a  "water  power,"  since 
the  power  is  the  abiding  thing.     An  endless  series 
of  living  human  beings  is  described  as  "humanity," 
since   that    remains   through   all    personal   changes. 
An    endless    series    of    workingmen   is   described  as 
"labor,"  and  we  study  the  "wages  of  labor,"   the 
"relations  of  labor  to  capital,"  etc.,   because  these 
are   permanent   relations.     Men   come  and  go,   but 
labor  continues  an(i  is  the  sour  >  of  a  permanent 
income.     It  is  actually  the  fact  that  in  speaking  of 
the   "lalxjr   problem"   or   the   "relation   of  capital 
and  labor"  we  usually  think  of  "labor  in  the  ab- 
•stract,"  as  we  might  term  it;    but  this  is  very  far 
from  implying  that  we  consider  a  series  of  genera- 
tions of  actual  workingmen  as  an  abstraction.     We 
may,  using  terms  in  a  like  way,  speak  of  the  problem 
of  interest  as  concerning  "capital  in  the  abstract"; 
but  this  is  far  from  meaning  that  we  consider  an 
endless  series  of  material   instruments  of  industry 
an  abstraction.     We  describe  these  real  things  by 
the  use  of  an  abstract  term,  just  as  we  describe 
a  thousand  other  realities.    A  "fund,"  a  "value," 
a  "permanent  quantum  of  wealth,"  is  capital;  but 
with  the  abstract  ^ntum  the  mind  always  merges 
the  thought  of  the  concrete  entity.     It  is  the  tools 


VARIKTIKS    OF    ECONOMIC   GOODS 


33 


of  industry  that,  in  tht>ir  endless  march,  come  into 
and  Ko  out  of  the  industrial  held  that  we  think  of 
even  when  we  use  the  abstract  tt-rm.  This  term, 
howe  er,  saves  us  from  the  danger  of  thinking 
merely  of  particular  tools  that  we  can  identify  and 
trace  to  their  Hnal  destruction  when  we  form  the 
concept   of  capital. 

The    ImjtorUunc    of     disvriiuinntimj    between     the 
Coneept    oj   ('npital   Humls   and    that    of   Capital.— 
Very   grcfil    is    the    importance   of   keei)ing   sharply 
distinct   the  two  concepts  of  productive  wealth  of 
which  one   is  descriLcd   by  the   term  capital  goinls 
and  the  other  by  the  term  capital.     In  the  one  case 
wv  think  of  a  particular  thing  which  we  identify, 
keep  in  mind.  ;uid  wutcli  as  it  goes  through  its  trans- 
formations, does  its  final  work,  and  perishes.     The 
brilliant    studies    of    Professor    Bohm-Bawerk    are 
basf'.i  on  the  idc-i  that  such  a  tracing  of  the  biog- 
rapirv   of  a   particular  instrument  is  the  true  way 
to    solve    the    problem    of    interest.     Yet    the    very 
terfn  intere.^t  itself   suggests    the    existence  of   what 
we  have  defined  as  f)ermanent  cai)ital  —  an  abiding 
fund  or  sum  of  wealth  that  every  year  yields  as  an 
inc.iiiie  .  cenaiu  per  vntage  of  itself.     The  "hundreil 
dolkjs     vi,M,is  -v(    dollars;  that  is,  the  fund  yields 
a  twf  iiti-ri!  if  t  :    tmount  which,  amid  all  the  changes 
of    K     -fenutL  M-    parts,   It   continu-.'s  to  embody. 
Ii    .-  rrtitr.   :nat-(..  that  a  study  of  <iil  capital  goods 
wmra  na^-^^     -:^^h\  or  will  exist,  with  due  attention 
TO    tseir  -^^::a:i^  to  each  other,   would  reveal  the 
M-   rht£      .-  T  maintain  such  an  endless  procession 
a<  las    >^-.  h-?re  (les^'ribed,  and  it  would  thus  bring 
o^.^-   ^t    iii^d.  sucn  a  concept  of  capital  as  the 
buisneis   uixn   bar    and  describes  by  the  monetary 


34 


ESSENTIALS   OP   ECONOMIC   THEORY 


form  of  expression.  By  making  a  synthetic  study 
of  capital  goods  in  general,  and  not  separate  studies 
of  particular  goods  as  they  come  and  go,  we  can 
obtain  a  grand  resultant  of  the  action  of  all  of 
them,  which  is  nothing  less  than  permanent  capital 
doing  its  continuous  work.  Such  a  comprehensive 
study  of  capital  goods,  if  it  is  carried  far  enough, 
becomes  a  study  of  the  abiding  entity,  capital. 
Allowing  ourselves,  however,  to  put  the  abiding 
entity  out  of  sight  and  merely  to  trace  the  origin, 
growth,  and  productive  action  of  separate  instru- 
ments of  production  would  be  disastrous.  The 
undying  body  in  which  the  particular  things  are 
tissues  absolutely  needs  to  come  into  view.  The 
very  mention  of  a  problem  of  interest  —  of  the 
percentage  of  itself  that  a  fund  of  a  given  amount 
can  annually  earn  —  puts  before  us  at  once  the 
permanent  entity,  capital,  and  the  problems  relating 
to  it.» 

'  Consumers'  goods  may  be  regarded  In  the  two  distinct 
ways  in  which  it  is  necessary  to  regard  capital  goods.  We 
may  look  at  particular  articles  for  consumption,  as  they  begin 
thoir  careers  by  ministering  to  their  owners'  needs,  and  follow 
them  as  they  wear  out  and  finally  perish.  This  gives  a  con- 
ception of  them  which  is  analogous  to  the  conception  of  capital 
goods  rather  than  to  that  of  capital.  On  the  other  hand, 
we  may  look  at  the  permanent  stock  of  usable  articles,  which 
i-  maintained  by  the  constant  coming  of  new  ones  to  replace 
those  which  are  worn  out,  and  in  this  way  we  get  a  conception 
of  permanent  consumers'  wealth.  The  flow  of  finished  goods 
from  the  shops  to  the  u.'^ers  offsetting  the  concurrent  destruc- 
tion of  such  articles  in  the  users'  hands,  has  the  effect  of 
maintaining  a  permanent  fund  of  consumers'  wealth  con- 
sisting of  perishable  goods  the  identity  of  which  is  always 
changing;  and  this  fund  is  analogous  to  permanent  capital 
as  we  have  defined  it.  Professor  C.  A.  Tuttle  has  advocated 
the  use  of  the  generic  term  wealth  to  denote  the  two  con- 
tinuing funds  wliich  we  have  here  termed,  on  the  one  hand, 


W- 


VARIETIES   OF   ECONOMIC   GOODS 


35 


Labor  as  a  Permanent  Entity.  —  The  term  labor 
is  sometiincs  used  to  describe  a  permanent  aggrega- 
tion of  laborers  no  one  of  whom  Uves  and  works 
through  more  tlian  a  brief  period.  Labor  is  thus 
analogous  to  capital  and  laborers  to  capital  goods. 
A  piitinaacut  lurking  force  is  composed  of  perish- 
able beings  as  a  permanent  producing  fund  is  com- 
pose!'  of  perishable  goods.  Both  are  commonly 
descriJMMl  by  the  use  of  abstract  terms,  but  both 
are  in  reality  concrete  things;  and  actually  to  re- 
duce either  to  a  mere  abstraction  would  be  to  put 
a  material  entity  out  of  existence.  We  instinctively 
speak  of  a  value  —  a  given  number  of  dollars  — 
in  describing  a  man's  capital,  but  it  is  dollars 
"invested  in"  productive  instruments;  and  we  in- 
stinctively speak  of  labor  when  we  mean  an  abid- 
ing force  of  workingmen.  Neither  capital  nor  labor 
is  like  an  inmiaterial  soul  that  can  live  apart  from 
its  boily.  Each  consists  of  a  permanent  body  with 
a  shifting  composition.  A  permanent  sum,  on  the 
one  hand,  a  i)erniancnt  amount  of  working  energy,  on 
the  other,  are  always  present,  but  they  are  in  goods 
and  men  respectively.     Each  may  well  be  described 


cupitul,  and,  on  the  other  hand,  the  permanent  stock  of  con- 
tjunuT.s'  wealth.  We  have  preferred  to  use  the  term  wealth 
in  a  sense  ^hat  is  generic  enough  to  include  b«)th  capital  and 
capital  goods,  and  both  the  permanent  stock  of  consumers' 
goods  and  the  particular  articles  that,  in  turn,  compose  it. 
Wealth  consists  of  effectively  useful  concrete  things  regarded 
either  as  particular  articles  that  can  be  identified  and  watched 
till  they  perish  in  the  usi.ig,  or  as  an  abiding  stock  of  articles 
of  this  genus,  each  one  of  which  has  in  itself  only  a  transient 
existence.  See  an  article  on  "The  Wealth  Concept,"  by  Professor 
Charles  A.  Tuttle,  in  the  Annals  of  the  Anwrican  Academy 
of  Political  and  Social  Science,  for  April,  1891,  and  other 
articles  by  the  same  author. 


L  »  1 


i« 


^ 


36 


ESSENTIALS   OF   ECONOMIC  THEORY 


I 


'jy  the  use  of  an  abstract  term,  and  in  prac- 
tical life  it  commonly  is  so;  but  it  is  a  concrete 
reality. 

Peculiarity  of  Land  as  a  Capital  Good.  — One 
reservation  needs  to  be  made  when  we  call  capi- 
tal goods  perishable.  If  we  include  land  under 
this  term,  we  must  make  it  an  exception  to  the 
rule  of  dcstructibility.  It  is  the  only  thing  that 
does  not  go  out  of  existence  in  the  using.  It  is 
not  a  produced  good  at  all  and  does  not  stand, 
like  other  goods,  in  an  intermediate  position  be- 
tween labor  and  the  gratification  that  labor  is  in- 
tended to  produce.  Work  did  not  create  it  and 
using  will  not  end  it.  It  will  be  called,  in  our 
study,  a  capital  good,  for  it  is  a  form  of  wealth 
which  produces  other  wealth.  It  enters  into 
the  permanent  productive  fund  that  society  is 
using. 

Differences  between  Land  and  Other  Capital  Goods 
Important  in  Economic  Dynamics.  —  It  is  in  a  later 
part  of  the  study  which  deals  with  economic  changes 

—  the  part  which  we  shall  call  Economic  Dynamics 

—  that  the  differences  between  land  and  artificially 
made  goods  become  prominent,  and  these  differences 
will  receive  due  emphasis  in  their  proper  place. 
In  studying  the  law  which  would  govern  economic 
society  if  no  essential  economic  changes  were  taking 
place,—  in  reducing  society,  as  it  were,  to  a  static 
state,—  we  find  that  there  is  a  certain  set  of  char- 
acteristics which  land  shares  with  those  capital 
goods  which  are  the  products  of  human  industry. 
In  static  studies  it  is  best  to  group  the  productive 
instruments  which  men  make  with  the  one  unmade 
good  which  nature  furnishes  and  to  recognize  that 


I 


Sfcll.-::i:^!^^i^ 


VARIETIES   OF   ECONOMIC   GOODS 


37 


together  they  embody  the  permanent  fund  of  pro- 
ductive wealth.* 

Mobility  an   Attribute   of   Capital  — Even   in   a 
static  society   capital   would   be  permanent,   while 
particular  capital  goods  would   be   perishable.    In 
dynamic  studies  another  quality  of  capital,  as  dis- 
tinguished from  capital  goods,  comes  into  the  fore- 
ground, namely,  mobility.    It  is  the  power  to  move 
without  loss  from  one  industry  to  another.     Goods 
cannot  be  thus  moved  with  any  freedom.    A  loom 
cannot  be  taken  out  of  a  woolen  mill  and  made  to 
do  duty  in  a  carpenter's  shop,  nor  can  a  circular 
saw    be    made    available    in    weaving.     When    t>^e 
loom  wears  out  and  needs  replacement,  it  is  in  the 
owner's   power   to  procure  either  another   loom   or 
a  circular  saw,  and  if  he  chooses  the  latter  alter- 
native, he  causes  capital  to  move  into  the  wood- 
working  business.    A   whaling  shij)   would   not   be 
useful  as  a  cotton  mill;    but  much  capital  that  was 
once  invested  in  the  whale  fishery  of  New  England 
has  since  found  its  way  into  manufacturing.    The 
transfer  can  often  be  made  without  waste.     If  the 
earnings  of  an  instrument  have  sufficed  to  replace 
it  with  another  that  is  lik(>  it,  they  may  suffice  for 
producing  an  instrument  that  is  unlike  it.     Waste, 
if  it  occurs,  results  from  a  failure  of  the  original 
instrument  to  earn  the  funrl  for  replacement.     Capi- 
tal which  thus  abides  but  passes  from  one  employ- 
ment to  another  is  a  body  the  identity  and  the 


m 


f.»m>i 


r.'- 


'  What  is  commonly  tormod  I.ind  contains  elements  which 
perish  in  the  using,  Such  are  deposits  of  coal,  ores,  or  oil, 
and  those  ingredients  of  loam  which  are  exhausted  by  tillaRc! 
Such  elements  of  the  soil  are  nnt  land  in  the  prnnomic  sense. 
How  they  should  be  regarded  will  be  shown  in  a  later  chapter. 


^_f'/^P%. .: •  "^  ^'   Wi.    -M: 


i 


: 


1; 


38 


E88ENTUL8  OF  ECONOMIC  THEORY 


character  of  whose  component  parts  change.  The 
transfer  of  capital  from  one  industry  to  another  is 
a  dynamic  phenomenon  which  is  later  to  be  con- 
sidered. What  is  here  important  is  the  fact  that  it 
is  in  the  main  accomplished  without  entailing  trans- 
fers of  capital  goods.  An  instrument  wears  itself 
'^ut  in  one  industry,  and  instead  of  being  succeeded 
by  a  like  instrument  in  the  same  industry,  it  is  suc- 
ceeded by  one  of  a  different  kind  which  is  used  in 
a  different  branch  of  production.  Goods  have  not 
moved  from  one  branch  to  another,  but  capital  has 
done  so. 

How  Capital  itself  may  be  Destroyed.  —  When  we 
speak  of  capital  as  permanent,  we  mean  that  using 
does  not  destroy  it  as  it  destroys  the  tissues  of  which 
it  is  composed.  Fires,  earthquakes,  and  business 
disasters  put  parts  of  it  out  of  existence  and  affect 
the  volume  of  the  fund  as  a  whole;  but  production 
itself  leaves  it  intact.  It  is  this  very  production 
which  destroys  capital  goods  and  makes  it  necessary 
to  replace  them. 


wms^Mm^imk^ 


CHAPTER  III 


THE   MEASURE   OF  CONSUMERS'   WEALTH 

In  all  stages  of  social  development  the  economic 
motives  that  actuate  men   remain   essentially    the 
same.    All  men  seek  to  get  as  much  net  service 
from  mater' i:  wealth  as  they  can.    The  more  wealth 
they  have,  other  things  remaining  the  same,   the 
.  better  off  they  are,  and  the  more  personal  sacrifice 
they  are  compelled  to  undergo  in  the  securing  of 
the  wealth,  the  worse  off  they  are.    Some  of  the 
benefit  received  is  neutralized  by  the  sacrifice  in- 
curred;  but  there  is  a  net  surplus  of  gains  not  thus 
canceled    by    sacrifices,    and    the    generic    motive 
which  may  properly  be  called  economic  is  the  desire 
to  make  this  surplus  large.     E.xcept  in  a  perfectly 
isolated    individual    life,  there    is    opportunity    for 
ethical  motives   to  affect   men's  economic  actions. 
Altruism  has  a  place  in  any  social  system  of  econom- 
ics, and  so  have  the  sense  of  justice  and  the  positive 
compulsion  of  the  law.    Altruism  does  its  largest 
work  in  causmg  men  to  give  away  wealth  after  they 
have  acquired  it,  but  conscience  and  the  law  power- 
fully  affect    their   actions   in   acquiring    it.    Thcsg 
arc  forces  of  which  Social  Economics  has  to  tak^ 
account;    but  the  more  egoistic  motive,  desire  to 
secure  the  largest  net  benefit  from  the  wealth-cre^ 
mg  process,  is  one  of  the  premises  of  any  economirt 
science.    This  involves  a  general  pursuit  of  wealth; 

39 


40 


ESSENTIALS   OF   ECONOMIC   THKORY 


but  men  seek  the  wealth  for  a  certain  personal 
effect  which  comes  fr^r  *he  use  of  it,  and  they  measure 
it,  when  attained,  by  nieans  of  this  subjective  effect. 

How  Specific  Utilities  are  Measured.  —  As  the 
essential  quality  of  wealth  is  specific  effective  utility, 
we  measure  wealth  by  estimating  the  amount  of 
this  quality,  and  it  is  always  a  consumer  who  must 
make  the  measurement.  He  must  discover  the 
importance  to  himself  of  a  small  quantity  of  a  par- 
ticular commodity.  The  hunter  must  find  out 
how  much  worse  off  he  would  be  if  he  were  to  lose 
a  small  part  of  his  supply  of  game  and  endure  some 
hunger  as  a  consequence.  In  doing  this  he  gets 
the  measure  of  the  effective  utility  of  any  like  quantity 
of  game,  since  any  one  specific  part  of  his  supply  is 
as  important  as  any  other  and  no  more  so.  The' 
estimate  of  the  importance  of  such  a  supply  of  food 
material  has  to  be  made  in  this  specific  way,  by 
taking  the  amount  on  hand  piece  by  piece,  and  not 
by  gauging  the  importance  of  the  whole  of  it  at 
once. 

Value  the  Measure  of  Specific  Effective  Utility.  — 
If  any  consumer  will  estimate  the  importance  to 
himself  of  a  single  unit  of  goods  of  a  certain  kind, 
and  multiply  the  measure  so  gained  by  the  number 
of  units  he  is  appraising,  he  will  make  a  measurement 
of  the  value  of  the  total  amount. 

V alms,  not  based^  on  the  Importance  of-Mie  Unial 
Supply  of  Goods.  —  It  is  essential  that  the  consumer, 
in  determining  the  value  of  a  kind  of  goods,  should 
not  estimate  the  importance  of  the  supply  in  its 
entirety,  since  that  would  give  an  exaggerated 
measure.  Measurements  of  value  are  always  made 
specifically,  and  single  units  of  the  supply  of  goods 


Mm^j^ 


MS. 


THE   MEASURE   OF   CONSTtMERS'    WEALTH 


41 


are  appraised  apart  from  the  remainder.  The 
total  utility  of  atmospheric  air  is  infinite,  since  the 
loss  of  the  whole  of  it  would  mean  the  total  de- 
struction of  animal  life ;  but  the  specific  utility  and 
the  value  of  air  is  nil,  since  no  one  limited  part  of 
the  supply  has  any  practical  importance.  A  room- 
ful of  it  might  be  destroyed  with  impunity.  So 
the  cereal  crops  of  the  world,  taken  as  a  whole,  have 
almost  infinite  importance,  since  their  destruction 
would  result  in  universal  famine;  but  each  bushel 
of  grain  has  an  importance  that  is  relatively  small. 
The  loss  of  it  would  impose  no  serious  hardship 
upon  the  average  consumer,  since  he  could  easily 
replace  it.  The  value  of  the  crop  is  determined 
by  the  importance  of  one  bushel  taken  separately 
and  by  the  number  of  the  bushels.  If  we  estimate 
the  importance  of  one  unit  of  the  supply  of  anything, 
express  the  result  of  the  estimate  in  a  number,  and 
then  multiply  this  by  the  number  of  units  in  the 
supply,  we  express  the  value  of  this  total  amount. 
The  total  utility  of  it,  on  the  other  hand,  is  measured 
by  the  benefit  which  we  get  from  the  supply  in  its 
entirety,  or  by  the  difference  between  the  state  we 
are  in  when  we  have  it  all  and  that  to  which  we 
should  be  reduced  if  we  lost  it  all  and  were  unable 
to  replace  it.  To  measure  any  such  total  utility 
we  contrast,  in  imagination,  our  condition  with 
the  full  supply  on  hand  and  a  condition  of  total 
and  hopeless  privation,  in  so  far  as  these  goods  and 
similar  ones  are  concerned. 

This  Method  of  mea.nmng  Wealth  Unirerml.  — 
These  principles  apply  as  well  to  the  economy  of 
a  solitary  islander  of  the  Crusoe  type  as  they  do 
to  that  of  a  civilized  societv.    A  Crusoe  does  not 


42 


ESSENTIALS  OF  ECONOMIC  THEORY 


.'  I 


n  if:,  T  \™''"  '°  ^"°"'-  where  utX' 

mediately   to  ZZ   !      ^'     '""'"  '^  "  PO"'^'  i"- 
sinee  all  that  they  are, ^h/    "'  "'?'^'"  """'J'' 

th...  that  r.zzr^::z^^/'t^ 
iTn^t  tS  :ar  vt '°  ^  ~ ; 

^       oms,  etc.,  ,s  how  much  power  they  have  to 

Jon   Wi.ser.   Von   BotrBawerk  ^L^'kl'^T'  '^^"^^••' 
"eflFective"  utility  anrf  ,♦..  ,  i  ♦  >Valras.     A   study  of 

the  present  Zealot  T'f^'T-  *°  ^"'"^'  ^^  ^^^^  ^^^ter  of 


THE   MEASURE  OF  CONSUMERS'   WEALTH  43 

create  the  goods  that  we  want  for  consumption 
specine  ^^ay.    The  capital  goods  have  to  be  taken 

ist  L'  X'  ''"^  ^^^"^  ^^^  P-^-t-e  purposes 

s  to  be  nghtly  gauged.    A  part  of  a  supply  of  pota 

toes  ,s  traceable  to  the  hoes  that  dig  them     but  .n 

valumg  the  hoes  we  do  not  try  to  and  out  how  much 

ZT  '"^  ""  '""r"''  "^  '^  '''  '^^^^  "«  hoes  at  Z     W 
endeavor  snnply  to  ascertain  how  badly  2  loss 
of  one  hoe  would  affect  us  or  how  much  good  Z 
restorat.on  of  it  would  do  us.    This  truth    like  the 

ZT:'r''  '"^  ^  ""'^^^^'  application    nefo 
nomics;   for  prmutive  men  a.s  well  as  c\v\]\..a 

n,ust  esti„,a.o  the  specific  produCh^/:  '^  tli: 

cor.l.ng  as  the  proounng  of  a  single  tool  of  one  kind 
becomes   more   important   than    procuring  one     r 
another  kind.    Indeed,  the  measuring  o  The  utjitv 
has  to  be  done,  as  «  shall  s<„„  see,  in  a  4   Itl 
i«  even  more  specific  than  this;  for   he  maTU  t„ 
detennme  not  only  how  many  hoes  he  wiH  Zke 
but  how  good  he  shaU  make  them.    The  o^aHtv 
of  each  tool  has  to  be  determined  in  a  manner  thlt 
we  must  hereafter  examine  with  care.    The  ear^' 
mg  power  of  capital  is,  as  we  shall  later  see  ^-eS 

cXua;;i.''™-°'^™"-"^''--«eh'sri„' 

Com  a„4  VmHy.  _  A  ripe  consumers'  good    In 

when  ,t  IS  recoivmg  utilities  at  the  hands  of  Zo 
oessive   producers     if    hoc  "^   "dnas  ot  sue- 

".>^  -.fwiTh:.,:  t"  n"  STthf  "T  •"; 

-fu,  a  man  confines  and  t^s'^^I,— ' 


t 


■>e  i 


.%■* 


{i!^r'.ym:^^;^j^i0i^^W^: 


44 


E8SKNTIALS    OF    KCONOMIC   THKORY 


"   i 


l\ 


willing  to  do  it  if  the  reward  ihat  he  expects  will 

more  than  pay  for  the  .sacrifice,  but  not  otherwise. 

Moreover,  this  sacrifice  itself  has  to  be  estimated 

specifically  in  a  way  that  is  akin  to  the  method  of 

measuring    utilities    which    determines    the    values 

of  goods.     It  is  necessary  for  a  man  to  gauge  the 

sacrifice  which  is  entailed  on  him,  not  by  his  labor 

as  a  whole,  but  by  a  specific  part  of  it.     He  finds 

himself  in  the  evening  feeling  the  fatigue  and  the 

sense  of  confinement  which  the  day  of  labor  has 

imposed  and  asks  himself  how  much  it  would  burden 

him  to  work  a  little  longer.     If  what  he  can  get  by 

this  means  pays  for  the  extra  sacrifice  involved  in 

thus  getting  it,  he  will  work  for  the  few  minutes, 

but  otherwise  he  will  not.     His  objection  to  a  few 

minutes  of  additional  work  measures  what  we  may 

call  the  specific  disutility  of  labor;  and  men,  whether 

they  be  primitive  or  civilized,  are  forever  making 

such   measurements.     They   consider   how   much    it 

will  cost  th(>m  to  add  slightly  to  th.>  k^ngth  of  their 

working  day  or  how  much  it  will  benefit  them  to 

shorten  it.     In  this  way  they  measure  the  specific 

disutility   of   labor   rather   than   the   total  disutility 

of  it,  since  they  do  not  gauge  the  relief  that  it  would 

afford  to  cease  working  altogether. 

The  Incrensitifj  Cost  of  Successive  Periods  of  Labor. 
—  It  is  easy  to  work  when  one  is  not  tired,  and  the 
first  hour  or  two  of  lal)or  may  even  afford  a  pleasure 
that  largely  offsets  the  burden  that  it  entails;  but 
it  is  hard  to  work  when  one  is  tired  and  painfully 
conscious  of  the  confinement  of  the  shop.  Adding 
anything  to  the  length  of  a  working  day  imposes 
on  a  man  the  necessity  of  working  at  the  time  when 
the   burden   is  greatest;    and   shortening  his   day, 


i^i-. 


i^f^h::^^  jmy^<w^£^ 


THE    MEASURE   OF   CONSUMERS*    WEALTH 


45 


i  -* 


for  a  like  reason,  relieves  him  of  some  of  his  most 
costly  toil. 

The  Natural  Length  of  the  Working  Day.  —  Any 
laborer,  a.--  his  work  goes  on,  hour  after  hour,  is 
certain  to  reach  a  point  at  which  it  is  unprofitable 
to  go  farther.  However  greatly  he  may  need  more 
goods,  he  will  not  need  them  as  much  as  he  needs 
rest  and  change.  It  may  be  that  he  has  worked 
twelve  hours,  and  that,  by  working  longer,  he  can 
improve  his  wardrobe,  his  food,  or  his  furnishings; 
but  if  he  has  a  tolerable  supply  of  such  things,  he  will 
hardly  choose  to  add  to  it  by  staying  in  the  shop 
when  his  strength  has  been  exhausted  and  he  is 
eager  to  reach  his  home. 

Specific  Cost  at  its  Maximum  a  Measure  of  Specific 
Utility.  —  Two  very  important  principles  are  at 
work  whenever  a  man  is  performing  labor  in  order 
to  create  wealth.  The  more  consumers'  wealth  he 
gets,  the  less  important  to  him  are  the  successive 
units  of  it,  and  the  more  do  these  successive  units 
cost  him.  The  tenth  hour  of  labor  adds  to  his 
supply  of  food,  but  this  addition  is  not  as  important 
as  the  supplies  that  were  already  on  hand.  If  we 
divide  the  supply  into  tenths  and  let  the  man  pro- 
duce a  tenth  in  each  successive  hour,  the  first  tenth, 
which  rescues  him  from  starvation,  is  the  most  im- 
portant, while  the  last  tenth,  which  comes  nearest 
to  glutting  his  appetite,  is  least  important.  This 
last  increment,  however,  is  produced  by  the  greatest 
sacrifice,  for  it  is  gained  by  making  the  working  day 
ten  hours  long  instead  of  nine. 

Let  the  hours  of  the  working  day  be  counted 
along  the  line  AD,  and  let  us  suppose  that  a  man 
gets  unit  after  unit  of  consumers'  wealth,  as  he  works 


ff.-K. 


I 


I 


j  ^' 


46 


ESSENTIALS   OF   ECONOMIC   THEORY 


hour  after  hour,  and  the  units  grow  less  and  k-ss 
important.  The  first  and  most  important  we  may 
measure  by  the  vertical  line  AB.  The  second  is 
worth  less,  the  third  stiU  less,  and  the  last  one  is 

worth     only     the 
amount  CD.     This 
means  that  the  suc- 
cessive     units     of 
what  we  may  call 
general  commodity 
for     personal     use 
have     declined    in 
utility    along     the 
curve  BC.    On  the 
other  hand,  as  the 
man's    labor     has 
been  prolonged,  it  has  grown  more  and  more  weary- 
mg  and  irksome.     The  sacrifice  that  it  involved  at 
first  was  ahnost  nothing,  but  the  .sacrifice  of  the  suc- 
ceeding hours  has  increased  until,  in  the  last  hour,  it 
amounts  to  the  quantity  expressed  by  CD.*    As  the 
man  has  continued  to  work,  the  onerousness  of  work- 
ing has  increased  along  the  ascending  line  AC  until 

'  If  we  should  try  to 
describe  all  the  possibili- 
ties in  the  case,  we  should 
take  account  of  the  fact 
that  a  man  may  get  a 
positive  pleasure  from  his 
first  hour  or  two  of  labor 
and  construct  a  figure 
thus  to  express  this 
fact : — 

AC  is  the  curve  repre- 
senting the  sacrifice  en- 
tailed by  successive  hours 
of  labor. 


Llkk 


THK    MEAStRE    OF    C0N81  MERS'    WEALTH  47 

the  point  has  been  reached  where  it  is  so  great  that 
it  is  barely  compensated  by  the  fruits  of  the  la  jor. 
The  mill  will  then  work  no  longer.  If  he  were  U  do 
so,  his  sacrifice  would  become  still  larger  and  his 
reward  still  less.  Up  to  this  [)oint  ii  i.>.  {)rofitahle 
to  work,  for  every  hour  of  labor  has  brought  him 
something  so  useful  that  it  has  more  than  paid  for 
whatever  sacrifice  he  has  made  in  order  to  get  it. 
Beyond  this  point  this  is  not  the  ca.se.  The  line  CD 
represents  the  cost  of  labor  at  its  ma.ximum,  an  1  it 
is  this  which  acts  as  a  measure  of  eflective  utility 
and  value. 

The  Coincident  Measure  of  Cost  and  Utility.— 
It  now  appears  that  the  line  CD  signifies  two  dif- 
ferent things.  It  measures  the  utility  of  the  last 
unit  of  the  man's  consumers'  wealth,  and  it  also 
measures  the  sacrifice  that  he  has  incurred  in  order 
to  get  it.  These  are  opposing  influences,  but  are 
equally  strong.  The  one,  of  itself,  makes  man  better 
off,  while  the  other,  of  itself  alone,  makes  him  worse 
off.  At  the  last  instant  of  the  working  day  they 
neutralize  each  other,  though  in  all  the  earlier  periods 
the  utility  secured  is  greater  than  the  sacrifice  in- 
curred and  the  net  gain  thus  secured  has  kept  the 
man  working. 

The  Point  at  which  Utility  and  Disutility  are  mu- 
tually Neutralizing.  —  At  a  certain  test  point,  then, 

In  like  manner  we  should  have  to  recc -nlze  the  fact  that 
the  utihty  of  some  kinds  of  goods  may 
not  reach  a  maximum  with  the  first 
incrcT  lent,  and  should  construct  a 
utility  curve  to  express  this  fact.  BC 
here  represents  the  increase  and  the 
fulio-.ving  lif.  icii.se  in  tiie  specihc  utility 
of  the  supply  of  an  article  of  this  kind. 


48 


ESSENTIALS   OF    ECONOMIC   THEORY 


i  t 


production  acts  on  man  in  such  a  way  as  exactly 
to  offset  the  effect  experienced  from  the  consum- 
ing of  the  product.  Man,  as  p  consumer,  has  to 
measure  a  iK'neficial  effect  on  himself,  and,  as  a  pro- 
ducer, lie  has  to  measure  an  unph'asant  effect.  He 
finds  how  nmch  he  is  benefited  by  the  last  unit  of 
wealth  which  he  f^ets  for  personal  use,  and  also  how 
much  he  is  burdened  by  the  last  bit  of  labor  that 
he  performs.  If  this  sacrifice  just  offsets  the  benefit 
derived  from  the  fintil  consumption,  it  is  the  best 
unit  for  measuring  all  kinds  of  utilities.  A  man 
secures  by  means  of  this  final  and  most  costly  labor 
a  variety  of  things,  for  if  he  works  up  to  this  point 
every  day  in  the  year,  he  will  have  at  his  disposal, 
say,  a  humlred  hours  of  labor  in  excess  of  what  he 
would  have  had  if  he  had  worked  a  third  of  an  hour 
less  each  day.  The  product  of  this  extra  labor 
will  bv,  taken  in  the  shape  of  goods  that  are  also 
extra,  or  additional  to  whatever  he  would  otherwise 
have  secured.  They  will  represent  special  com- 
forts aiul  luxuries  of  many  kinds.  The  values  of 
these  goods  may  be  measured  and  compared  by 
means  of  the  (juantity  of  labor  that  the  man  has 
thought  it  worth  while  to  perform  in  order  to  get 
them.  If  he  values  one  of  them  highly  enough  to 
think  it  worth  while  to  work  for  an  extra  period 
of  twenty  minutes  at  the  end  of  a  day  in  order  to 
get  it,  it  may  be  said  to  have  one  unit  of  value;  and 
if  he  is  anxious  enough  to  get  something  else  by 
doing  this  on  two  successive  days,  this  second  article 
may  be  said  to  have  two  units  of  value.  The  savage 
who,  by  working  for  an  extra  hour,  makes  some 
improvement  in  his  canoe,  and  by  doing  the  same 
thing  on  another  day  makes  some  improvement  in 


-W.. 


m;'wm'mmmm:. 


THK    MLASUKK    OF    CONSrMKH.s'    WKAI.Tl 


49 


his  foo'l,  establishes  th('ich\-  the  fin-t  that  he  vahics 
tiu'sc  two  additioiuil  hits  (»f  coiismiicts'  wealth 
t'ciually.  If  ho  us(«s  ten  hours  of  the  same  .-ostly 
kiiul  of  lahor  in  niakiiifr  an  adihtiuii  to  his  liut,  hv 
proves  that  he  values  that  fijaiu  ten  titnes  as  hicjliiy 
as  he  does  either  of  the  others.  Ivstahlishin-,^  values 
hy  means  of  sueh  final  costs  is  a  proeess  that  yoes 
on  in  every  staf^e  of  soeial  evolution. 

rn:ike   Result.'^   oj  Creatintj    Wealth    and    Using   it 
Sumniari.:c<L —  WvnUh^    then,   adeets    a   man   as   a 
consumer  in  one  way  and  the  same  man  as  a  pro- 
ducer  in   an    jpposite    way.     In    the   one   ca.se   the 
effects  are  favor,  jle,  and  in  the  other  ?hey  are  un- 
favorable.    At  a  certi-'  1  test  point  the  two  efiects 
may  be  equally  stronji   -^  motives  to  action,  and  so 
may  be  .said  to  be  (Miuivalent.     Ti     man  is  impi'lled 
to  work  by  his  desire  for  a  final  unit  of  wealth,  and 
he  is  ileterred  from  it  by  his  aversion  for  the  final 
unit  of  labor  which  he  will  have  to  incur  if  he  secures 
the  benefit.     If  he  performs  the  labor  ami  j^ets  the 
iH-neht,  he  neither  }j;ains  nor  lo.ses  as  the  net  result 
of  this  particular  part  of  his  labor,  thou«;h  from  all 
other  parts  of  his  labor  he  f^ets  a  nt  t  surplus  of  benefit. 
It  is  natural  to  measure  all  such  economic  f;ains  in 
terms  of  sacrifices  incurred  at  the  test  point  where 
the.se   are   ^reatesf.     This    is    the    labor   one    would 
Iiave  to  incur  in  order  to  add  the  means  of  gratihca- 
tion  to  his  jinjviou.s  supply  of  consumei-s'  goods. 

Minimum  Gains  offset  Maximum  Pains.  —  Run- 
ning  throufrh  and  through  the  economic  process 
are  these  two  difTerent  measuring:;  operations.  Man 
is  forever  e.stimatinfj  the  amount  of  harm  that  wealth 
does  hini  when  he  is  in  the  act  of  producing  it,  and 
the  amount  of  good  it  liucs  him  wlu  u  he  consumes 


1. 


-■-"-"'--          fee. 

M^-^M^} 


50 


ESSENTIALS   OF    ECONOMIC   THEORY 


it ;  and  there  is  always  to  be  found  a  point  where  tho 
two  amounts  are  eijual.  It  is  the  point  at  which 
gains  are  smallest  and  sacrifices  greatest.  It  is  at 
this  point  that  men  measure  values  in  primitive 
life  and  in  civilized  life.  How  in  the  intricate  life 
of  a  modern  society  the  measuring  is  done  we  shall 
in  due  time  see;  for  the  present  it  is  enough  that 
we  perceive  the  universality  of  the  law  according 
to  which  value  is  best  measured  by  the  disutility 
of  the  labor  which  is  most  costly  to  the  worker. 
Organized  societies  do  something  which  is  tan- 
tamount to  this.  It  is  as  though  the  whole  social 
organism  were  an  individual  counting  the  sacrifices 
of  his  most  costly  labor  and  getting  therefrom  a 
unit  for  comparing  the  effective  utilities  of  different 
goods. 

How  Primitive  Man  tests  Value.  —  It  is  a  mistake 
to  suppose  that  what  is  essential  in  value  depends 
on  the  existence  of  an  actual  market  in  which  things 
are  exchanged  for  each  other.  In  a  market,  it  is 
true,  values  are  established  and  their  amounts  are 
expressed  in  ways  that  cannot  be  adopted  in  primi- 
tive life.  When  we  buy  a  thing,  we  help  to  fix 
the  value  of  it  and  of  other  things  which  are  like  it. 
The  mere  ratios  in  which  things  exchange  for  each 
other  in  a  marke*.  arc,  however,  by  no  means  the 
essence  of  value  itself.  That  is  something  deeper 
and  is  one  of  the  universal  phenomena  of  wealth. 
Value,  as  we  have  said,  is  the  measure  of  the  effective 
utility  of  things,  a  kind  of  measure  that  every  one 
is  frequently  compelled  to  employ,  whether  he  is 
making  goods  for  himself  or  buying  them  from 
others.  A  producer  who  has  tho  option  of  making 
different  things   for   himself   needs  to   know   what 


JW. 


^f 


l^t 


THE   MEASURE   OF   CONSUMERS'   WEALTH         51 

variety  of  goods  can  \ye  increased  in  supply  with  the 
greatest  advantage  to  himself  as  a  consumer.  Add- 
ing to  the  supply  of  any  one  of  them  is  getting  a 
"final"  or  "marginal"  unit  of  eonsumei-s'  wealth. 
It  is  something  that  is  needed  less  than  the  things 
that  were  already  on  hand.  Without  making  such 
a  comparison  of  the  importance  of  niarginal  units 
of  different  commodities  he  cannot  use  his  resources 
in  the  way  that  will  do  him  the  most  good.' 

How  Imlnted  Mm  measure  Final  Utility.  —  If 
a  cave  dweller  {)o.sse.sses  a  store  of  one  huntlred 
measures  of  nuts,  h(>  measures  the  final  utility  and 
the  value  of  this  store  in  the  manner  which  we  have 
described.  If  he  were  to  be  deprived  of  the  whole 
stock,  he  might  starve,  but  this  fact  docs  not  afford 


» The  terms  marginal  and  final  mean  essentially  the  same 
thing,  but  t'  ■  modes  of  conceiving  it  differ.  When  utilities 
are  thought  of  as  .supplied  one  after  another,  the  last  is  the 
least  important.  We  may  represent  a  man's  enlarging  grati- 
ficution.s,  not  by  such  a  mere  series 
of  quantitative  increments,  but  by 
an  enlarging  urea.  \Ve  may  draw  a 
series  of  concentric  circles,  begin- 
ning wit*i  the  smallest,  and  let  this 
central  area  inclose  the  most  neces- 
sary forms  of  consumers'  wealth. 
When  we  draw  a  s«>cond  and  larger 
circle,  we  inclose  between  it  and  the 
first  one  a  zone  which  includes  those 
forms  which  come  next  in  impor- 
tance •  Hy  continuing  to  draw  circles  we  reach  an  outeiTOOst 
one  whicli  boun.Is  a  zone  in  which  are  included  the  lea.st  im- 
portant of  the  consui.ar's  ac(|ui.sitions.  These  are  the  things 
which  he  gets  with  his  costiitst  incn-ment  of  labor,  and  the 
things  which  lie  b(  yoiid  the  circle  la.st  drawn  would  not  pay 
for  the  sacrifice  which  aciiuiring  them  would  cost.  In  the 
acccmipayinr;  fiirnn-  the  fifth  zone  includes  the.s<>  "marKinal" 
forms  ol  wealth. 


^JiL^l^ 


52 


ESSK.VTIALS   OF    hXONOMIC   THEORY 


the  basis  of  (ho.  value  which  he  puts  on  the  nuts 
He  measures  the  hnportanee  of  this  consumers' 
wealth  .^pec/ieally.  He  tests  the  dieet  of  losing 
one  measure  ami  no  more,  and  finds  that  he  could 
lose  the  sn.^de  m<.asure  witl.n.t  sufTering  greatly. 
Ihe  difference  L.twrn  having  an  appetite  fully 
satiated  and  having  it  very  n(>arly  so  is  not  serious. 

Let  AD  represent  the 
savage's  total  supply  of 
food.  AB  will  represent 
the  utility  of  the  first 
"init;  CD  of  the  hun- 
dredth. If  we  supply 
the  food  unit  by  unit, 
the  utility  of  the  suc- 
cessive increments  will 
decline  along  the  curve 
^^^'-  When  the  man  has 
a  hundred  units  of  (nml,  no  one  unit  of  it  is  worth 
any  more  than  the  last  one,  since  if  any  one  were 
taken  away,  the  last  one  could  oe  put  in  the  place 
of  it. 

The  lofal  absolute  utility  of  the  food  is  measured 
by  Ih.'  area  AliCD,  but  the  total  value  will  be  rep- 
resented by  the  rectangle  ADCE.  The  area  EEC 
measures  the  surr)lus  of  ut.lity  contained  in  the 
earlier   units   in   the   series. 

Tlw.  Motive  for  measurimj  Values  in  Primitive 
Uje.  _  Kvcn  the  cave  dwell.T  woul.l  have  to  measure 
values,  an.l  would  thus  have  to  apply  the  principle 
of  hnal  utility,  because  he  would  need  to  spend  his 
';"";:•<!  l>'o.luctive  (..u-rgies  in  the  way  that  would 
<lo  nm  the  most  good.  When  he  is  nearly  satiated 
■■'   ''   •"■iuo  utii,  r  iiuii;,r.s  niore  than  he  does 


THK  MEA8URK  OF  COXSUMKRs'  WkaltH     53 

food  stuffs.     If  ho  his  si.^nr^  I 

uctthatanya.!;n^::::X''h:^"^^^^^^^ 
by  an  hour's  labor  w«ul,l  J      ,  "    "''''>'  ^"'^ 

what  ho  roul,i  ^Vo  ''"  "'^^  ^"  '''"'  ^'^^^ 

louid  got  of  somo  other  pnxhirt    l.v  fl,« 

samo  amount  of  labor,  it  is  in.,.o,t .  • 

change  his  occun-.tirv,        ,     ""  ""t'lnt  for  him  to 

t[.e  «„al  unit  „f  this  „,„„,', 2     r"'^''^ 
the  l,iRh,.r  ,!,.;;„,,  „f  „,,,f„l,„„;''"'''    """■I'-lm.s 

;;;^n.,,„...;;,,/;c;,t  ;;;;:;■;:,:,  :^:^^^^^^^^^^ 

wouJu    value    th-it    i;f.,  ..,»••  " 

,  .  ''"'-•^ustanunir    m,,,,!    f„r    ,,.i,„. 

IL"™''' ":  ^r ' ""''  «i„„„;  „tv  ,.f™.„;  't 

g  i  T';  M  "■"*  "^ ''""  "■""""'■' ■■'  " 

gt-t  It,  or  to  the  amount  he  would  h-.v,.  i  c 

in  onicr  ,„  ,H  „n,,,iu.  M„„  I :  •" ,  v,;;:';"'' 

po»..,o„  that  b,  labor  the  „,a„  c     I,,       ,     :    X 

n«-<.r  ix.  nu,rc  than  .„„n«h  ,„  „,r,„,  ,  „,  ^,^     f' 

"f  a  n,arK,nal  „r  finalhour  of  labo,-:   an,    t  ™ 

».'mKl.'un,tofro|,ia,vabl,.ro„,u,,,ir,,J'    ,,'" 

iiK,  ,t.    A  nan  w.ll  ,,r,z,.  ,(  a,T„r,lin„  to  his  .Ir,.,,! 

work     hiV    :,  f  "'"'"'*•'■'"  '"""• "'  '"'»■■  "■  >'■"'  'laVs 
work,  th,,  ra,.i  „  an  ev„k.„co  lh„.  ih,.  importance 


t-  ■   'f 


1^ 


i  '  i« 


t  -. ' 


"'i^ 


mfmi^m^m^\,jw^^^st^ 


M 


54 


ESSENTIALS  OF   ECONOMIC   THEORY 


V.    I 


of  the  original  supply  of  the  food  is  measured  and 
expressed  by  this  personal  cost  of  replacement; 
and  as  any  similar  quantity  in  a  large  supply  of 
food  can  be  duplicated  by  the  same  amount  of  labor, 
it  appears  that,  by  a  standard  based  on  cost,  the 
effective  utilities  of  all  units  are  equal,  that  of  each  one 
is  measured  by  the  "  disutility"  of  an  hour's  labor  and 
that  of  the  whole  supply  is  this  amount  multiplied 
by  the  number  of  units  that  this  supply  contains.* 
How  Primitive  Man  measures   the  Productivity  of 

»  Although  we  may  use  the  terms  jinal  ittility  and  cffrrtive 
utility  in  a  way  that  makes  tht-ni  n(>arly  interchangeable, 
it  is  clear  that  the  qualities  for  which  the  two  terms  stand 
are  by  no  means  id  nticul,  and  that  effective  utility  must 
be  studied  in  any  complete  analysis  of  value.  In  distinguish- 
ing final  utility  we  assume  that  the  units  of  the  supply  of 
goods  of  a  particular  kind  are  furnished  on(  by  one,  and  we 
measure  the  absolute  titility  of  each  unit.  The  line  AB  meas- 
ures the  <d)8olule  utility  of  the  first  unit  supplied.     This  meas- 

urciiient  docs  not  take  any  account 
of  the  cost  of  replacing  this   unit, 
for  it  does  not  recognize  the  pos- 
sibility of  replacing   it.     What  is 
estimated   is   the  absolute  impor- 
tance of  the  service  which  this  first 
unit  of  the  article  renders,  on  the 
supposition  that,  if  this  first  incre- 
ment of  the  supply  were  wanting, 
the  service  would  not  be  rendered 
at  all.     It  is,  in  like  manner,  the 
absolute   utility  of  the  suceea-^ive   incnnieiits  supplied  which 
declines    along   the   curve    BC       DC    measures    the   abfolule 
utility  of  the  final  increment,  and  the  area  A  BCD  the  total 
absolute  utility  of   the  supply,     If   the  goods   can  be  repro- 
duced by  labor,  the   total  effective  utility  is  less,  since  it  in 
measured,  as  we  have  seen,  by  the  aniount  of  sacrifice  which 
the  replacing  of  one  lost  unit  would  entail  multiplied  by  the 
number  of  units  in  the  siipply.     It  is  the  amount  expressed 
by  the  an>a  AECD  which  i.-  the  amount  of  the  value  of  the 
goods,  since  measure  of  cfTcctivc   utility  and  value  an*   the 


*-a 


THE  MEASURE  OF  CONSUMERS'  WEALTH    55 

Labor  and  Capital.  —  Thore  is  a  truth  relating  to 
producers'  wealth  that  resembles  the  truth  that  we 
have  just  stated  with  regard  to  consumers'  wealth. 
The  more  consumers'  goods  of  one  kind  a  man  has, 
the  less  is  the  value  that  any  one  of  them  has  to 
him.  The  more  producers'  goods  of  a  given  kind 
a  man  has,  the  less  is  the  eflRciency  that  any  partic- 
ular one  of  them  possesses  as  an  aid  to  labor.  The 
last  bit  of  bread  serves  the  man  himself  in  a  less 
important  way  than  does  the  first,  inasmuch  as  it 
gratifies  a  want  that  is  less  intense;  and  the  last 
implement  of  a  given   kind  —  the  last  hatchet  or 


same,  both    in    the  ra.sc  of   a  singlo   unit   and   in    that    of  a 
total  supfily. 

We  have  rlispoverod  two  reasons  wliy  the  ofTootive  utility 
of  any  one  of  tlif  oariicr  units  is  equal  to  the  absolute  utility 
of  the  final  one.  The  first  rea.son  is  that,  if  any  one  of  them 
were  lost,  the  final  one  would  be  put  in  the  plaee  of  it  and 
the  consumer  would  suffer  no  loss  exrept  what  would  be 
entailed  by  goiuR  without  the  la.st  unit.  The  .second  reason 
i.s  that  if  the  consumer  should  lose  any  one  of  the  earlier  units, 
he  could  replace  it  by  the  same  amount  of  labor  that  would 
replace  the  final  one.  We  have  seen  that  the  line  DC  of  the 
figure  expre.s.ses  not  only  the  absolute  utility  of  the  final 
unit  of  goods,  but  the  disutility  of  the  labor  of  reproducing 
it  or  of  reproducirg  any  other  unit.  The  co.st  of  replacing 
the  whole  supply  is  expres.sed  by  the  area  AECD,  on  the 
suppo.sition  that  the  units  are  replaced,  one  at  a  time,  by 
means  of  labor  peiforined  at  the  end  of  .several  working  days 
when  the  sacrifice  :s  greatest.  Total  value  is  thus  quanti- 
tatively equivalent  to  total  cffrrtivr  sacrifice  of  re,laceTn€nt, 
a.s  well  a.s  to  total  efftctive  utility.  If,  by  adding  a  brief 
period  to  the  length  o'  one  working  day,  a  man  can  make 
good  the  lo.ss  of  one  unit  of  the  goods,  by  adding  the  same 
period  to  the  length  of  a  number  of  working  days,  he  can  make 
good  the  loss  of  the  total  supply.  For  simplicity  we  a<ssume 
that  the  man's  physical  condition  remains  unchanged,  and 
that  an  extra  hour  of  labor  at  the  end  of  any  one  day  costs 
him  aa  much  as  it  would  at  the  end  of  any  other. 


56 


KSSENTIAL8  OF    KCONOMIC  THKOUV 


spade  or  arrow  —  helps  him  less  in  his  productive 
operations  than  did  the  first  one.     On  the  one  hand, 
we  have  the  law  of  th(>  diminishing  utility  of  suc- 
cessive units  of  consumers'  goods,  and  on  the  other 
hand,  we  have  a  parallel  law  of  the  diminishing  pro- 
ductivity of  successive  increments  of  producers'  goods. 
The  Necessity  for  measuring  the  Productive  Powers 
of  Capital  (Umls  even  in  PrimHive  Life.  —  Now,  it 
is   necessary   for  cviTy   producer,   though   hving   in 
the  simplest  possible  maimer,  to   measure  in  some 
way  the  efficiency  of  the  last  unit  of  each  kind  of 
productive   instrument   that    he   uses.     Ho   has,   let 
us  say,  a  certain  numlxM-  of  hatchets  and  of  arrows, 
and    he   can   produce   one   hatchet   with   the   same 
amount  of  labor  that  would  produce  an  arrow.     Now 
if  a  hatchet  will  do  more  good  than  an   arrow,  he 
will  direct  hi.s  energies  to  the  making  of  the  hatchet. 
It  is  important  that  any  producer  should  bring  the 
final  units  of  the  difTerent  parts  of  his  e(iuipment 
to  a  certain   uniformity  of   protlucing  power.     He 
must  not  go  on  adding  to  the  stock  of  implement 
No.  1  when  implement  No.  2,  which  could  be  had 
by  the  same  expenditure  of  labor,  would  do  more 
good;    nor  must  he  add  to  the  stock  of  either  of 
the.se  after  he  has  actjuired  such  a  supp'y  of  them 
that  the  first  unit  of  imjilement  No.  3  would  be  of 
greater    importance.     Measuring    the    efficiency    of 
producers'  goods  is  nece.s.sary  in  the  case  of  every 
one  who  creat(>s  wealth  at  all,  and  such  measurements 
reveal  the  fact  that  the  more  i)roflucers'  goods  of 
one  kind  a  man  has,  the  le.ss  is  the  productive  power 
that  resides  in  one  of  them.* 

'The    law   of   diminishiiiK    returns   of   snrcessivo    unit.s   of 
capital  goods  i.s  ba.<ed  on   the  samo   principle  as   the  law  of 


r 


!?*:'::#^r'^l«^>^ 


W^i£^^^^SMEp4 


THE   MKASURR   OF    CONSl'MKRS'    WKALTH 


The  F 


Tn 


iral 
rue 


' oregoing 
facts  which   have   Ix^on   thus  far  stated   hoM 
whorovor   wealth    is    produccl.     They   .lo    n„t    uw- 
supposo  the  faets  „f  a  ,hvisi„n  „f  lah.ir  an.l  a  svste.n 
of  oxchan^.,.  an.l   th..y  do  mt   even   require"  that 
there   should    Im*   any   social   (.rKa..izati<.n.     M,,,    i„ 
the  most  |)rimitive  tril„.s  an.l  ..yen  .n.-n  livin-  in 
truso(.-hke  isolation   w.,ul.l  cr.-at.-    wealth   l.y  lal>.,r 
aided  by  capital.     The  ,.ss..n,v  .,f  that  walfh  woul.l 
Ik-  effective  utility,  an.l  th.-  m.-asinv  of  this  which 
Ks  value,  woul.l  !«•  nia.l..  in  tl...  sp.rihc  wav  that  we 
have  ,lescril>e.l.     The   varh-tLs  of  capital!  the   .lis- 
tmction  lK>twe(.n  capital  a.i.l  capital  p.o.ls  an.l  the 
law  of  dunu.ishins  pro.luctivity  .,f  such  floods  woul.l 
appear  m  the  most  primitive  ec.)n..mi<-s  as  w(>ll  as 
m   the   most    advance.l.     Thes,.   are    by    uo    means 
all  of  the  facts  and  principles  which  are  thus  of 
universal  a,,plication.    Th(>y  are   n.erely  a   few  of 
the  more  nnportant  an.l  may  serve  as  a  foun.lation 
or   a    "(Jrun.lleKunp,"    for    further   stu.lv      If    we 
should  exten.l  our  list  of  general  a.i.l  hasic  truths 
It  woul.l  quickly  appear  that  the  incom..s  that  have 
l)een  treated  as  rent  an.l  th.-  vari.,us  sur,,lus  ^^ains 
which  are  analogous  to  rent  are  universal  econ.,nn-c 
phenomena  which  it  w..ul.l  l,e  not  ill.,fri,a|  to  .liscus. 
m  the  preliminary  part  of  this  tr.vitise.     What  has 
been  stated.  how«>ver.    conc.Tnin^    the  laws    of    di- 
mmishing  pro.luctivity  of  su.-cssive   units  of  pro- 
ducers'  w.'alth,   oncernins   the  diminishing,'   utility 

diminishing  rr-tums  of  rnpilnl.  I),.t  it  is  n„t  i.jontical  with  it 
VVo  shall  SOP.  in  d.i.-  tin..-,  h..w  .-v  p..nnan.„t  fmul  .,f  pr..,i,„.rrs' 

^Z  f  ""Ti-  f"""  ""•'  '''''  •■•■"•*^  "•■"•  """■  'i-'^  '"t  ■•"l<l-s 
'tsolf  to  tho  fund,  ,roat.-s  a  small.T  iiu-omo  than  did  its  nrrdo- 
oessor.  J"  "HI. 


-      r 

;..ti 


M 


i  4^  .i_. 


1  : 

i 


1  'I 


58 


ESSENTIALS   OF   ECONOMIC  THEORY 


of  successive  units  of  consumers'  wealth,  and  also 
concerning  the  increasing  burdciisoineness  of  con- 
tinuous hours  of  labor,  presents  the  essential  prin- 
ciples on  which  all  rents  and  quasi-rents  rest.  It 
is  best  to  study  the  applications  of  these  principles 
as  they  are  made  in  a  civilized  state. 

Universal    Economic    Truths    independent    of    the 
Special  Facts  of  Sociology.  —  This   first   division  of 
economic  science  borrows  none  of  its  premises  from 
sociology,  for  the  truths  which  compose  it  would 
abide  if  there  were  no  society  in  existence.     Basic 
facts  it    takes   from   Physics,   Biology,   Psychology, 
Chemistry,  etc.     Facts  concerning  man,  nature,  and 
the  relation  between  them  are  material  for  it,  but 
relations  b^ween  man  and  man  come  into  view  only 
in  the  later  divisions.    Th.^ro,  uidee.l,  they  do  come 
into   th(>   very   foreground   with   results   which   im- 
meavsurably  enrich  the  science.     What  we  may  call 
the  socialization  of  the  economic  process  we  shall 
have  next  before  us,  and  we  shall  find  it  full  of  critical 
problems  involving  the  future  well-being  of  humanity. 
Industry  is  carried  on  by  a  social  organism  in  which 
men  are  atomic  parts  ami  to  which  nature  has  given 
a  constitution  with  laws  of  action  and  develo[)ment. 
We  have  first  to  stuily  tlu-  nature  of  this  industrial 
organism  and  the  mode  in  which  it  would  act  if  it 
were  not  subject  to  any  constitutional  change;    and 
later  we  must  study  it  in   its  process  of  growth. 
The  economic  action  of  a  society  which   is  under- 
going no  organic  changes  is  the  subject  of  Social 
Economic   Statics,   while   such   changes   with   their 
causes   and   effects   constitute   the   subject   of   the 
science  of  Social  Economic  Dynamics. 


>ta&LiCi«kJ 


M^MJk. 


CHAPTER  IV 

THE  SOCULIZATION  OF  INDU8TR7 

We  have  now  before  us  a  few  principles  of  so 
general  a  kind  that  they  apply  to  the  economy  of 
the  most  primitive  state  as  well  as  to  that  of  the 
most    advanced.    It    is    not    necessary    that    men 
should  live  m  any  particular  relation  to  each  other 
m  order  that,  in  creating  and  consuming  wealth' 
they  should  exemplify  these  principles.    They  w„uld 
do  this  even  though  they  never  came  into  touch 
with  each  other,  but  lived,  as  be.st  they  could,  each 
man  on  his  solitary  farm.     Laws  of  this  general 
kind  result  from  man's  relation  to  nature,  and  not 
at  all  from  the  relation  of  different  men  to  each  other 
Let  a  man  keep  wholly  aloof  from  other  men   apr.Iy 
his  labor  directly  to  nature,  and  he  can  produce 
wealth  of  the  various  kinds  that  we  have  .lescribed 
He  can  secure  food,  clothing,  and  other  things  for 
his  own  use,  and  he  can  make  tools  to  help  him  in 
secimng   them.    He   will   appraise   the   consumers'  . 
goods  according  to  the  law  of  what  has  been  called 
final  utility  or,  in  another  view,  effecti^o  specific 
utility,  and  he  will  also  test  the  comparative  use- 
fulness of  his  various  tools  by  an  appeal  to  the  law 
ot  nnal  or  specific  productivity. 

Social  Economy  the  Chief  Subject  of  Study  -Wo 
'.^''^  '""«t  to  know  how  an~^5S^S~;;;;ri;tv  nr- 
<nu-es  and  uses  its  wealth;  and  in  making  this  inquiry 
--  encounter  at  once  phenomena  that  are  not  uni- 

69 


::f  -'I  n 


1f  f 


4- 


60 


KSSKNTIALS   OF    KCONOMir    TUKORY 


vcrsal.    TIh 

c(KH)crativdv.   hy   tin 


( iviliicc(|    sdcicty    creates    its    wea'th 
joint   action   of    Rs   various 


inenilMTs;    that  is,  i^^  proceeds  l)y  means  of  a  divi- 
siuti  of  labor  and  an  exclian^hiK  "'  products.     More- 


over, it  has,  m  soin(>  way,  lO  share  the  sum  total  of 
its  gainiTlunon^   its   variolls   meml)er.«'.     miaJPto 
apporllutr  lilhor    iktHOIlf!    diHerent    occupations    for 
the  salve  of  collective  production,  which  is  a  grand 
synthetic  operation  whereby  each  man  puts  some- 
thing into  a  conunon  total  which  is  the  income  of 
all   society.     It    has,    further,    to   divide   the   graml 
total    into    shares    for    its    dilTerent    members  —  an 
analytical  operation  in  which  each  man  takes  some- 
thing  out   of   the   aggregate    for   his   personal    use. 
This  Ls  diitributiuu  in  the   narrowiT  sen.se  of  that 
pterin  —  the    a|)portioiunent    among    the    members 
^  of  a  civilized  society  of  the  fruits  of  production.     In 
the  wider  sense  the  term  also  includes  the  appor- 
**  tiomnent  of  the  sacrifices  incurred  in  the  joint  pro 
duction.     Distribution,  as  thus  defined,  is  the  ele- 
incnt  that  appears  in  economic  life  in  consecpiencr 
ol;  social  organization..   This  is  a  secondary  element. 
ind7'ed;    for   man,    nature   and  their  ndations   and 
interactions  are  the  primary  facts,  and  the  relations 
of   men   to   each   other   come   logically   after   these. 
/Social    organization,    however,    is    so    traiisforming 
,in  its  elTects  as  to  reduce  to  small  projjortions  the 
; amount  of  attention  it  is  worth  our  while  to  devote 
/to  the  economy  of  the  i)riniitive  types  of  life.     It 
is  necessary  to  make  some  study  of  that  economy, 
for  it    is   *hi..-<   that    we   place   before   ounselves   the 
,   fact    that    there   ar(>    universal   economic    laws   and 
perceive  di-thictly  t!ic  nature  of  .sunu-  of  the  more 
important  of  them. 


THK    HOCIALIZATID.N    <  "F    IM)l  STUY 


()1 


Fart.s  PiTullnr  In  St>riali:cil  In'hi  Iri/.  Xhv.  Unin 
I'olitirnl  Kritnomij  (|^•ll(lIt•^  ;»  s<mciici.'  of  iiKluatiy  ' 
103  thus  sociali/ctl,  for  il  is  n  science  of  \'uy  wealth: 
whjrh^is  proiluccd  in  an  ori,'aiiizc(l  way  liy  the  people, 
ofjijuorc  or  less  civnizril  statT-T  The  ^^eriTl  Tint hs 
which  we  have  thus  far  stated  apply  to  '>  an 
cconotny,  indeed,  hut  they  also  apjily  to  •    ,,ith- 

creatin^    and     wealth-consuniin^f    pincc  ,       ,, 

civilized   peoples,   and   even   of   isolat         t      , ;  '   ,;> 
who  have  no  dealiiijis  with  each  o  '    i 
truths  of  ICconoinics  in  the  unrest  let..!  >,••, 
we  have  now  to  stuily  the  special  •      " 

Kcononiy.  When  production  jrne>  •,  '••  '  <;,.  , 
of  labor,  as  wlien  one  man  works  at  (m;'  ■i.  ,i  .i,;  .:■ 
anil  another  ;it  another,  pheiiotnena  appe  .  ,,,  '■■, 
not  ap|>ear  in  w  -e  primitive  life;  and  stiii  ,,.i.,  .> 
appear  when,  within  each  occupation,  there  is  a 
ilivisior.  of  functions  between  the  laborer  and  the 
capitalist,  as  is  the  case  whenever  one  m  t  of  meti 
furnish  tools  of  production  and  another  set  do  the 
work.  The  special  laws  of  this  hi-rhly  develope<l 
economic  system  nMjuire  far  more  (>xtended  <tudy 
than  do  those  more  fji'iieral  laws  winch  are  common 
to  it  an<l  simpler  systems.  We  now  cotilinue  to 
roc^iize  tiie  universal  and  basic  truths  which  have 
Ixm  stated  in  the  forejijoinj;  chapters  and  proceed 
to  the  study  of  the  special  principles  which  apply 
only  to  organized  economic  life. 

Spedalimi    Pm<h»-l44t)v  Uie    Means    of    Diversified 
Consumptian.  —  Ai^    the    kinds    of    goods    that    w«  v  /• 
individually  make  become  f(>wer,  the  things  which    X 
we  got  and  use  i)ec(.me  more  numerous  and  varied   / 

and  commerce  tu  well  ut-  munufactuiing. 


^i'.-M 


■%'; 


m 


t 


*  I 


''^^' 


■      .^4  3 


62 


ESSENTIALS   OF   ECONOMIC  THEORY 


■  it 
I,  pi 


f 


I. 


—  auch  ia  the  law  nf  economic  srwicialization.  So- 
ciety as  a  whole  protluces  an  infinite  variety  of 
thiiif^s,  and  the  individual  member  of  it  secures  for 
himself  goods  of  very  many  kinds.  The  typical 
modern  worker  is,  in  his  prtwluction,  a  very  narrow 
specialist,  but  in  his  consumption  he  is  far  less  a 
specialist  than  was  the  rude  hunter  who  was  able 
to  ciijoy  only  the  f ( w  goods  which  he  himself  pro- 
duced. The  modern  worker's  ta.stes  are  omnivorous, 
for  he  has  developed  an  immen.se  variety  of  wants 
and,  through  social  organization,  he  has  ac(iuired 
the  means  of  satisfying  many  of  them. 

The  Po.siliot)  of  Individuals  in  the  Producing  Or- 
ganism. —  \Vhen_ar  saj_tha^_uroduction  has  l^en 
■sQciidized,  we  mean  something  very  far-reaching. 
^Ve  mean  that  an  organization  has  tfrown  up  in 
f\'hich  men  are  members  or  parts  of  members,  and 
jihat  this  great  organization  ha.s  undertaken  to  do 
''|the_j)rodu(-tiv('~wi)rk  for  all  the  individuak-that 
compose^  it.  For  tlie  first  time  we  now  recognize 
a  sociologiciil  fact  among  the  pn>mises  of  economic 
science.  Wln'n  pj^m  whose  |)redece.ssors  may  have 
lived  in  i.solated  families  or  in  a  .society  organized 
for  defense  or  for  the  mere  pleasures  of  a.s.sociation, 
now  develop  a  truly  economic  society,  the  ind^dual 
depends  on  other  individuals  as  well  as  on  natuTe  for 
the  supply  of  his  wants.  Kconomic  independence 
gives  way  to  iiitcrdependence,  becau.se  the  fortune  of 
each  man  is  largely  dependent,  not  merely  on  his  own 
ellorts,  but  on  the  relations  which  he  sustains  to  other 
men.  Simple  laws  of  nature  still  largely  control  his 
income,  but  social  laws  also  have  a  certain  control 
over  it. 

lixvhniuji's  in  their  Pruuitirc  Stujje.  —  The  exchang- 


'.sfe. 


THE  SOClALIZATnN   OF   INDUSTRY 


63 


ing  of  products  is,  of  course,  the  process  with  which 
the  organization  begins,  and  this  process  is  intro- 
duced by  easy  and  natural  stages.  The  n.an  wlio  at 
first  makes  everything  for  himself  develops  a  particular  V 
aptitude  for  making  some  one  thing;  and,  though  ho 
may  still  continue  to  make  most  things  for  himuelf, 
he  finds  it  advantageous  to  barter  off  a  part  of  the 
supply  of  the  one  article  for  the  making  of  which  he 
is  especially  w(>ll  fitted.  He  seeks  out  a  neighbor 
whose  special  aptitude  lies  in  a  dilTerent  direction  and 
who  has  a  surplus  of  some  otlu-r  article.  It  may  be 
that  one  is  a  successful  fisherman  and  the  other  is, 
by  preference,  a  maker  of  clothing,  and  that  they  can 
get  a  mutual  benefit  by  an  exchange  of  food  for 
raiment.* 

The  Intemiedinte  Type  of  Exchangex _arui,iiie^ Eiml 
One.  —  Injhe  ne.xt  stage  a  man  Ijeconies^ jivhi)l[y_a 
^edalist^makjiijr^QHC  ^[j^^  of qircjduct  cmbLanjrbar- 
tering^  it_awa^_ fojl pthyrs.     It  might  .seem, 'at  the 
first  glance,  that  differentiation  has   now  done  its 
full  work;    but  it  is  very  far  from  having  done  so. 
Making  one  complete  good  for  consumption  is  .still) 
a  complex  operation,  whicfi  can  advantageously  l)e| 
sulxlivided  in  such  a  way  that  one  man  produces  a» 
raw  material  while  another  works  jt  up  into  a  usehil 
shape.     A  ajJUnmy  iH^^made  by  a  further  dLYifikm  « )f 
the  manufacturing  process,  whereby  the  first  worker 
niakes  only  the  rawest  material,  another  fashions  it 

'  If  wo  wen.  RiviiiK  a  hi.story  oi  the  (livi.«i.,n  of  labor  wo 
should  hiiv..  to  ncoril  (1...  HTcts  of  .liironnc-s  of  .li.nat.- 
mid  of  agrictiltural  and  ii.irHral  rcHonn.s  in  (..casionini;  at 
an  .-arly  p.-rio.!.  a  territorial  division  of  labor  We  an-  h.re 
<leH,.nbing  th.-  division  of  labor  whirl,  oe.urs  wi,|,in  a  society 
ai.d  in  con.sequenee  of  what  may  b.^  eall.d  .social  economic 
caUM^s. 


V 


?4 

•if 


m^^ 


4\ 


. 


H 


I 

I 


64 


K8SKNTIALS    OF    KCONOMIC   THKORY 


I 


somewhat,  a  thini  cani.vs  tlio  process  farther,  an.l  a 
fourth  or  a  still  later  one  eoinpletes  it.     In  modera  \ 
ni'liistry  the  n.ate.ial  must  often  pass  through  very  ' 
many  han.ls  l,,.f,.,v  it  is  ready  to  he  made  over  to  the( 
consumer,     l^ji.-h  n.an  m  jhe.series4,iilij,_toueh  on 
itjindj^)asses  it  on  to  hisjqi(;ce.s.sor. 

A'" 
A" 
A' 
A 
A"'  IS  ail  artiele  of  consumers'  wealth  and  A  is 
the  rawest   inaleiial  that  enters  into  it.     A'  is  thi.s 
material  .somewhat   transformed;    A"   is   the  same 
material  after  it  has  nrcia.d  the  .s.^ond  transforma- 
tion and  ne,..ls  only  a  final  tou.-l,  to  eonvrt  it  into 
A"',  III  whieh  state  it  will  be  rea.ly  for  the  eonsumer's 
us.>.     We  h.-ive   here  a  sy.nl,o|   of  what    is  actually 
takiiifr  place   in   tli.'   iii,lu.<tiy  ef  the   world.     Cattle 
aiv  firazin-  (.n   western   iaii<-h(.s:    hid(-s  are  tanning 
inth<'woo,lsori>„n..sylvania;  l<-at  her  is  going  fhrouf,di 
the  many  changes  that  fa.shioii  it   into  shoes  in  the 
mills  of  Mnukton;   shoe,  are  arranged  on  the  .shelves 
of  retail<-rs  in  .\,.w  York  in  rea.liness  for  the  peoph. 
wIk.  aiv  to  wear  tlwin.     These  ...v  stages  in  th.-  mak- 
ing of  a  single   product,   and   a   (l.ousaii.l   <li(T,>rent 
products  are  coming  into  existen.v  i,;  a  like  way. 

-1    Uri„r.nilal,u,i  uj  thr  Croups,  or  SjH-iiir  Imlus- 
/nc.v.  ir/urh    compose    luoinmir   Snrirh/.        U   we  put 

heside  tl„.  M.nVs  of  \V  ,,  .Mri,.<  ,,f  IV.  and  one  oi' (-.s, 
w.'  havr  a  much  >iinpliti,  d  representation  of  what  ;^ 
''-"'"'l^l^'l^i''«  place.  Tiicnan  J,,  realitv.anivriad 
••f  ■iidereiit  thingsuiiich  dmost  everv  .„nsun.ei  "um'. 
'•""I  '^'-v  .,„  .,r  ,|,,,„  i.  n,..,d..  hy  ;.  .^eries  of  pro- 
ductne  upcratu.n.v   |,k.    ,1,,.  ..i.e   v\r  l,a\.    ,!,    rrihed 


"jss^^f^n^ssisis^: 


THE   SOCIALIZATION   OF   INDUSTRY  65 

The  very  fact  that  there  arc  so  many  of  them  that  it 
18  Hopeless  to  try  to  represent  them  all  in  the  table 
makes  it  desirable  to  illustrate  the  principle  by  tabu- 
lating only  a  few  and  to  assume  that  these  few  are  all 
that  there  are.     For  the  purposes  that  we  have  in 
nun.l  ,t  is  entirely  safe  to  suppose  that  a  scTies  of 
A  s,  one  of    H's.  an<l  one  of  C's  represent  all  the 
consumers'  goods  that  society  uses.     What  we  wish;' 
to  a.scertah.  is  how  the  ditf..n>nt  series  work  tog.-ther 
to  furmsh  an  income  for  each  memlx>r  of  societv  ' 

T/KMimmiion  Spmjaneoii...  ~  Uxhuvrs  c-an  m 
vvlu^n^tlu^)^^ 

nito_an^rderl>MH^      to  .-uch  othoJ,-^^;^^ u, 

certain  proporttgnsJQl^n^ntJndustries.     Capital- 
ists  also  are  freo  tn  iiii..>..rTi7I7Z~7rr~i ., — * — rtr- 


;  ♦  — i r «^^iiiiiii±ii__ijiuurNiiirs,     lapital- 

i-sts  also  arc:Jre(Mto  mvo^^  11,;;^^ 

an(l  j^t^rejs^a_certain  amo;int  thafVi^^inT^ili; 
degHedUo  each  branchy  busi^sTT-TTSFTTnTap- 
portiomnent  takes  place  we  can  most  readily  ascertain 
by  creating  such  an  imaginary  an.l  very  n.uch  sim- 
plihed  society  as  this  table  furnishes. 


A'" 
A" 
A' 
A 


1}'" 

ii" 

IV 

n 


;iv(' 


("" 
C" 
C' 
C 
already  studied, 


The  series  of  A's.  which  we  .,„..,,.,  ,,,,„,„ 

.•I.res-.nts  one  kind  of  raw  n.aterial  ripening  into  a 
'nnsh,..l  product.  B  represer.ts  a  second  Kind  of 
'•aw  n.atenal.  which,  like  tl...  A,  is  produ.-.l  bv  its 

J.  set  of  workei-s  and  is  then  pusse.|  on  to  a  s,;oncl. 
^  w,  .ransform  it  into  W  ---a  partly  finish,.!  product 
'  '«-■  th<>n  pass  .t  on,  as  the  corresponding  set  of  tn.-n 
l-H-d  on   the  A'.     Th.y  hand   it  over  to  a  set  J 

wormn.  who  change  it  int.,  ir.  a  nearly  completed 
'"-''"'•t.  and  these  hand  it  over  to  men  at  H'"   who 


fx'  ^  J^ 


66 


EtJiJiNTIALS   OF    ECONOMIC   THEOHY 


i 


by  giving  the  final  fashioning,  bring  it  into  the  form 
of  a  finished  consumers'  good.  The  C's  represent 
another  general  group  of  workers  who  transform  the 
raw  material,  C,  into  the  finished  product,  C". 

Industrial  (iwups  and  Subgroups.  —  EafilL-ot-Uiese 
more  general  bodies  of  workmen  and  employers. 
sucITas  the  entire  series  of  A's,  we  may  call  an  in- 
dustrial  t^roup.  and  the  divisions  within  each  of  them. 
Buch  as  A'  or  A",  we  may  term  subtrrouns.  The 
product  of  a  group  is  a  complete  article,  while  that 
of  a  subgroup  is  not  a  complete  article  nor  any  part 
of  an  article  that  can  Ix'  taken  bodily  from  it.  Yet 
it  is  a  distinguishable  element  in  the  article.  The 
product  of  the  shoe  factory  is  certainly  not  complete 
shoes,  for  the  owners  of  the  factory  buy  leather  which 
has  already  passed  through  the  hands  of  tanners; 
an<l  the  tanners  themselves  bought  it  in  the  sliai)e  of 
raw  hides,  which  w(>re  furnished  by  still  earlier  pro- 
ducers. What  the  shoe  factory  has  ilone  is  to  impart 
a  new  utility  to  dressed  leather  by  transforming  it 
into  shoes.  It  would  l)e  imjjo.ssible  evt>r  to  get  that 
utility  out  again,  or  to  point  to  any  one  part  of  the 
shoe  as  the  oidy  part  that  contains  it.  What  the 
factory  has  really  made  is  therefore  a  utility  —  a 
tlistinguishable  (piality  which  pervades  a  concrete 
thing.  It  makes  the  <lifTerence  between  the  leather 
and  the  shoes.  What  the  taimer  has  created  is,  in 
like  manner,  another  utility,  which  makes  the  ditTer- 
ence  Ix'tween  raw  hides  and  leather,  (troups.  theiL 
in_their  entirety  produce  whole  articles  for  direct 
use,  while  subgroups  produce  distin[p]ishnlil<-  nlilit.ii'H 
whicTParc  emtjodied  in  such  jirtides.  The  sum 
total  of  all  the  different  utiliti<.:a  ^  CflMtitutes  the 
Jtrticle.     It    is   a   complex   of   useful   qualities   held 


'.y^s 


THE   SOCIALIZATION    OF   INDU8TBY  67 

together  by  thg  fact  that,  fhev  arp  .t.to.K^  ^„  ^^.^ 
same  original  mflt.t,f.r 

Proporlimate     Froduclicm.  -  All_the     subgro.in. 
woHun£iog(alu^^ 
thcmisumci^-  woalth  thatsoeietx  m^iK^ivro- 

'^''^'\^!!!^^^AS21}^m^Xt£^\^  in  nicely 
a.ijustocl  pro,,p_rtiqns.     Unle*.  th7^;^;;^rar^K;F7;rtTre 
^'mup  system  is  clisturiMnl.  there  is  a  normal  amount 
o    .\      put  on  the  market  and  also  normal  amounts 
of  M     and  ("".    This_result  isattaincdJiiLiuflutnci^s 
that^un  through  the  pttxlwOvt^tH-gaftiw^-Audhriiig 
a  H.ut  an  adjustment  of  the  comjmrative  amounts 
of  ]a[x,r  ,n  th..  different  occupations.     If  competition 
worked  (,uite  fnrly,  this  adjustment  would  be  so  nice 
that    no   military   apportionment   of   forces   among 
.iifTerent  brigades,  regiments,  etc.,  made  consciously 
a!i<     f)y   the    most    intelligent   commanding  officer 
could  surpass  the  perfection  of  it.     There  would  bc' 
also  an  e(,ually  fine  a.lju.stnient  of  the  comparative 
amounts  of  capital  devoted  to  different  industries 
In  the  actual  pr<.<luctiv(.  organi.^n  each  man  goes 
where  h."  will  -nvpitalist,  laborer,  an<l  employer  of 
car)ital  an<l  lalxir  alike.     Kach  man  acts  in  this  re-    ^ 
spect  as  though  there  were  no  such  thing  as  coercion   \ 
and  as  though  he  might,  with  unchecked  freedom   d.l 
so|(.ly  what  is  good  in  his  own  sight.     Hv  rea.son  of  the 
fact  that  nil  are  .s.rking  to  produce  what  thev  can  in 
order  that  fh,.y  n.uy  g.-t  what  th,.y  .-an,  then-  conu's 
into  operation  an  organic  law  which  brings  the  groups 
and  subgroups  into  a  delimit,,  balance,  in  point  of 
size  and  output,   when-by  the  grand   total  of  force 
that  society  commands  is  prevented   from   making 
»<>"'"'"•'>  of  „„<•  product  an.l  too  little  of  another 
and  IS  made  to  ,lo  its  utmost  in  getting  a  larire  sum 


\ 


I 


esjs3t^. 


I 


68 


ESSENTIALS   OF   ECONOMIC  THEORY 


total  of  wealth  for  the  benefit  of  its  various  mem- 
bers. 

What  the  " Divitdun  of  Labor"  Inrnlvea.  —  This  is 
the  real  signification  of  what  it  has  Iwen  common  to 
call  the  division  of  labor.  It  is  the  socialization  of 
labor,  or  the  gathering  of  isolated  laborers  into  a  great 
organism  that,  ejitirely  without  coercion,  determines 
in^sonu;  way  what  each  one  shall  do,  and  not  only 
makes  the  product  of  the  whole  a  myriadfold  greater 
than  without  any  organization  it  could  be.  but  causes 

ttlis     prO(iyct_to__tjl)^i-    r'prtnin     urnll  nrljiiiitnrj  jihajiCS 

which,  as  we  shall  later  .see,  serve  consumers  better 
than  '  hey  could  b<!  served  by  proilucts  in  misa(lj,ujjted 
proij  j_ions. 

('     ital  as  well  as  Labor  Appnr/umpii  —  As  we  have 
■fi  re  is  a  corresponding  division  of  capital  or 
irnnjent  of  different  parts  of  the  total  fund  to 
it  employments;  and  this  is  made  in  the  same 
is  the  division  of  labor  and  results  in  an  e<iually 
istm    it.     Kach  bit  of  capital,  like  each  work- 
coni      as  it  were,  a  specialist.     It  may  take 
!>«•         !i  instrument  which  is  capable  of  pcr- 
^  one  service,  like  the  loom,  which  is 
capuiii  iomg  nothing  except  weaving;    but  i'ven 

if  t!'  t'  is  .somewhat  adajjtable,  like  a  hanuner 
which  can  be  used  in  .several  trades,  it  is,  as  it  were, 
stationed  in  one  trade  and  held,  by  econo.nic  inllu- 
ences,  at  that  one  point  in  the  system.  The  house 
carpenter  keeps  his  hanuner  though  the  cabinet 
maker  could   u.se  it.     ImicIi   bit  oi  c!t|)ital   helps  to 


ill' 
ay 

ilCt 

iiiai 
he     : 
lorni  ! 


create  a  particular  utility,  and  the  mmdHr pf  units 
of  the  lund  that  each  subgroup  contains  is,  as  we 
shiiirsrT^'^j^Hri'iriTgerl  't^Tireijable"tlu;_fini<i  as  a  whole 
to  du^its   utmost  7ui"   t.he_jieneraJ._gui2(I.     It   is   all 


THE   SOCIALIZATION    OF    INDUSTRY 


69 


without  tho  use  of  force,  since  each  bit  of  capital  does 
what  its  owner  pleases  to  have  it  do. 

A    Onvemment    Presnppn.^p^  —  Of    rourse    there 
must  be  a  government  over  it  all.    Such  a  mcthoil  of 
producing  wealth  could  never  continue  unless  jjroperty 
were  secure  and  unless  it  were  made  so  without  much 
effort  on  the  part  of  its  owners.     A  blacksmith  who 
should  have  at  one  moment  to  use  his  hanmier  as 
a  tool  and  at  an(»ther  to  wield  it  as  a  weapon  of  defense 
could  make  but  po(jr  headway,  and  a  society  in  which 
such  a  state  of  things  cxi.sted  in  various  trades  would 
be  too  anarchic  tct  permit  the  elaliorate  division  of 
trades  which  is  the  ktv  to  success  in  indust.-y.     The 
mo.st  no'iceablc  fact  about  organized  production  is 
that  man  is  forever  letting  go  the  thing  he  has  made 
or  helped  to  make  and  allowing  it  to  pass  out  of  sight 
and  reach  without  losing  or  greatly  imf)eriling  his 
title  to  the  amount  of  wealth  it  represents.     He  ca.sts 
his  bread  on  the  waters,  but  they  bring  him  a  return 
for  it.     I'ndrr  these  <irciimstances  it   is  impossible 
for  him  to  protect  his  product  as  the  savage  protects 
his  tools,  his  clothing,  and  his  hut.     What  a  modern 
worker  makes  passes  into  the  fiands  of  other  men  and 
gets  com|)l,'tely  out  of  the  maker's  direct  p.rsonai 
control.     If  he  wanted  it  atrain.  he  could  never  find 
it :  and  if  he  could  hnd  it,  it  would  Im'  in  a  new  .shape 
and  ctlicr  men  would  have  claims  upon  it.     The  man 
who  has  sold  some  liidc-  that  m  the  end  have  become 
sho<s  can  h.ardly  identify  his  product  on  tlie  .-iielves 
"f  retail  shoe  dealer-  ;ill   over  (he  country,  or  per- 
haps all  over  (he  world.     If  by  a  miracle  lie  could 
find  the  particular  liits  of  leather  (hat  in  their  raw 
stage  he  hmiself  has  furnislu  d,  they  would  be  in  new 
and  far  more  valuai)le  forms  than  Ihev  were  when  he 


70 


ESSENTIALS  OF  ECONOMIC  THEORT 


^1^ 


I 


lli 


I 


I 


i'  1  f 

-^1  - 


t 


S   I 


had  possession  of  them.  The  shoes  contain  utilities 
which  the  man  who  furnished  the  hides  cannot  claim 
to  have  created.  They  have  been  changed  and  im- 
proved by  elements  contributed  by  many  other 
persons,  such  as  manufacturers,  carriers,  merchants, 
etc.,  and  he  could  never  carry  away  the  concrete 
thing  that  he  himself  produced  without  carrying 
with  it  other  men's  property. 

The  SurreruUring^ol  Goods  and  the  Retention  of 
Values  Features  of  .gcH^^tV /gjug^(T2f.  —  Spf'jflJlTafinn 
of  industry  means,  then,  that  individuals  forego  aU 
effort  to  retain  their  own  concrete  products,  but  that 
they  retain  certajn^rts  of  the  value  of  the  products 
to  which  they  have  made  contributions.    The  value 
of  A'"  when  it  is  sold  is  claimed  by  men  at  A'",  A", 
A',  and  A  according  to  some  principle.    The  values  of 
B'"  and  C"  can  be  followed  until  they  reach  the 
pockets   of   the   men    who   have   contributed  their 
several  shares  to  the  making  of  these  things.    AU. 
this  j^quires  a  government  and  a  well-developed  sys- 
tem,of  law8"aiTid~c6urt87or  the  protection  nf  propoHy , 
including  the  protection  of  it  in  the  form  of  a  claim  to 
a  value  that  is  embodied  in  things  which  have  gone 
beyond  the  maker's  reach.     Property  here  takes  a 
/refined  form  which  requires  that  the  man  should  forego 
jail  desire  to  keep  the  literal  thing  he  has  made  and 
ishould  make  it  his  aim  to  retain  the  value  of  it  in  some 
I  other  form.     It  is  a  comparatively  simple  matter  to 
guard  a  concrete  article  which  a  man  has  in  hk  pos- 
session, though  oven  that  retjuires  some  enert^y  on  thr 
part  ;)f  t!ie  jjolice  force  and  i.s  never  (juite  perfectly 
acpomplished ;   but  it  is  a  far  more  difFicult  matter  to 
enforce  a  claim  that  a  man  1     ;  against  other  men, 
in  consequence  of  some  utility  \l»at  lias  bt;en  created 


I 


THE   SOCIALIZATION    OK   INDUSTRY 


71 


by  him  but  has  gone  away  from  him  and  mingled  with 
utilities  created  by  many  other  persons  in  a  product 
that  the  man  will  never  see.  It  is  the  problem  of 
guaranteeing  to  the  shoemaker  tlie  due  return  for 
the  stitches  he  has  put  into  shoes  when  the  shoes 
themselves  have  gone  to  buyers  and  wearers  in  every 
quarter  of  th(>  land  and  many  quarters  of  the  globe. 
Groups  under  n  Socialistic  Slate.  — In  jpoliticQl 
economy -aitjilktinclf rum  _2e;^£ra/  economy  we  take 
one  premise  from  .sociology  and  another  froni  politics. 
VVa.assumetliat  society  t^xist^^^^  ha.s  taken '^ 

on  a_politicaJ  ch_&racter^  by  e.^tabli.shing  laws  with 
courts  to  interpret  them  and  oflicials  to  enforce  them. 
^^J-iO-Jlot,  however,  a.ssume  that  the  direction  of 
in(iustjJ4jLffai'2JlLn  the  han(ls  of  such  officials,  la 
tlie  main  indu.stry  is  organized  in  a  spontaneous  way. 
Men  choose  such  occupations  as  they  like,  and  when 
there  are  too  many  of  them  in  one  group  and  too  few 
m  another,  the  rewards  naturally  increase  in  the 
group  where  a  larger  force  is  n(>edcd,  and  this  lures 
men  in  that  direction. 

In  a  socialistic  society  snrh  «,diu.stmenfs  vymilH.  K^ 
'nadfLJinder_Uie_diivction_of  state.    Officials 

would  have  to  decide  when  more  workcra~S?e  needed  in 
the  A  .series  and  less  in  the  B  .series  and  would  have 
f(.  us<«  either  inducements  or  some  kind  of  compulsion 
m  ordcT  to  move  them  from  the  one  group  to  the  other. 
V\hat  we  actually  have  to  deal  with  is  a  .society  that 
shapes  itself  by  tlu-  frc.^  acts  of  in<livi<luals,  and  we 
have  to  .s(.o  how,  in  this  way,  it  organizes  itself  for 
[)ro.hiction  and  (iivid(>s  among  difTcrent  Haiinants  the 
product  that,  by  the  joint  action  of  all  of  them  it 
creates.  ' 

Gaimjrom   the^Organi^atim  of  Industry.,  — lih.o. 


72 


E88KNTIAKS   OF    ECONOMIC  THEORY 


I 


advantagoH^  of  Lhc-dkiaion  of  labor  consist  in  an 
increase  ia  the.  quantity  of  products^  and  in  an  Tm 
provpment  in  their  faJaiitj^  and  the  rLuantitativejj^iin 
is  siniost  iK-yond  comjniting  The  acivantage  appears 
mainly  in  the  middle  and  upper  subgroups  of  the 
series,  which  transform  the  materials,  rather  than  in 
the  lower  subgroups,  which  produce  them:  and  yet 
there  is  a  gain  everywhere  from  such  organizi.llfjn. 
A  man  produces  far  more  when  he  performs  the  same 
operation  many  times  than  when  he  goes  through  a 
whole  series  of  unlike  op<'rations.  Moreover,  he  can 
perform  the  single  operation  far  more  accurately 
and  can  thus  attain  a  more  perfect  result.  He  can 
learn  his  minute  trade  mon  easily  than  he  could  a 
complex  one.  Where  unusual  strength  or  skill  is 
required,  the  work  may  ho  given  to  persons  who  have 
the  reijuisite  quality  so  that  a  good  p-oduct  can  b(> 
insured,  an<l  none  of  the  labor  of  these  superior 
workers  will  need  to  1m>  wasted  on  work  which  inferior 
labor  can  perfectly  well  perform. 

Inii)rnremenl  in  the  Forms  of  Capital.  —  The  great- 
^**^  J.^Ij!:!!.l!!lll^*'^^"t^K<'f'  that  come  from  thiTdivision 
and  suIkH visionToT' wealt  h-crivilmg  'processejii  onmPR 
in  the  way  of  applying  machinery.  A  macliinels'a 
hopeless  specialist  and  can,  as  a  ruTe,  put  only  a  single 
minute  touch  on  the  material  submitted  to  it;  and 
the  introduction  of  machines  ditTerentiates  capital  in 
a  way  that  is  parallel  to  the  miruite  subdivision  of 
laI)or.  If  the  machine  is  to  work  at  all  i  (•(•iiomically, 
it  must  put  its  touch  (juickly  on  one  after  aiidther 
of  a  .series  of  articles,  as  they  are  submitted  Ut  it 
ill  uninterrupted  sucn  ^sion.  If  only  one  kind  of 
machine  were  employ,  d  in  the  making  of  .shoes  — 
if,  for  instance,  the  .^(  wing  of  the  uppers  tu  the  soles 


li^' 


/k^j^i^- 


THK    HOriALIEATIOV    OF    INDfSTRV 


73 


wore  (lonp  on  sowing  tnachinos,  ovon  though  all  tho 
rest  wpro  (lone  by  hand  -  it  wouM  Jx'  natural  and 
almost  nroossary  to  have  one  class  of  workers  to  pre- 
pare the  uppers,  another  to  |)repare  the  soles,  and  a 
third  to  sew  them  together  by  aid  of  the  maehine. 
When  the  several  stages  of  the  process  are  thus  given 
over  to  different  classes  of  workers,  the  situation  is 
ripe  for  the  application  of  more  machines,  and  in- 
ventors readily  devise  apparatus  that  will  perform 
one  or  another  minute  part  of  the  manufacturing 
process.  In  the  end  most  branches  of  manufacture 
take  such  shapes  that  the  raw  material  is  intrusted 
to  a  series  of  machines  an<l  passes  from  one  to  another 
by  a  nearly  continuous  movement,  till  it  emerges 
from  the  hands  of  these  automata  as  complete  as  any 
manij)uIation  can  make  it  and  ready  for  the  merchants 
who  will  convey  it  to  their  customers. 

Kamnmji  nj  JZojdtal.  —  Tlir'n-  is  an  economv_of 
capital  involved  in  the  funt  7l...f  in^tnimuLtr  rmhr 
usnj^  Urns  TOnUrmouslj-.  A  worker  does  not  \mvo  to 
have  s<-veral  sets  of  tools,  many  of  which  would  be 
idle  the  greater  part  of  the  time,  as  would  be  the  case 
if  the  man  performed  several  unlike  ojjcrations;  tliii. 
the  grejUestjimiiuni^'jioiljes^  rai)idity, 

anTamiracy  wjt lijvvhich  Jlie  new  instrum^ents  act. 
The  tools  are  far  ntore  etiicient  than  they  coulTlM^if 
human  nuisdes  furnished  the  f)ower  aiid  eyes  and 
nerves  supplied  the  deftness  and  accuracy  that  the 
making  of  the  goods  re(|uires.  Automata  which 
men  s(  t  working  excel  hand  tools  with  men  wielding 
them  by  a  greater  ratio  than  can  be  calculated. 


f'\ 


.iik^:^.,ijmakt  •  HMmLiM^^^Ki'imF.^si 


LS5K*-i 


MICROCOPY   RESOLUTION   TEST   CHART 

/ANSI  ond  ISO  TEST  CHART  No.  21 


I  45 
■  SO 


3.2 


2.5 
2.2 
2.0 

1.8 


_^  /APPLIED  INA^^GE 

S^  '65-^   East   Mam   Street 

S^S  f?.ochester.    New    York         U609        USA 

'■^S  (716)   482  -  OJOO  -  Phone 

^S  ("S)   288  -  5989  -  Fa. 


1  <• 


CHAPTER  V 

PRODUCTION  A  SYNTHESIS;    DISTRIBUTION  AN  ANALYSIS 

The  essential  fact  about  production,  as  it  is  carried 
on  by  all  society,  is  that  it  is  a  synthetic  operation". 
by  which  a  grand  total  is  made  up  by  the  mnt.rihn- 
tions  of  different  industries.  There  is  a  corresponding 
fact  about  the  production  which  is  carried  on  within 
a  particular  line  of  business,  or.  as  we  should  exprpss 
it,  within  a  particular  subgroup:  ferjvitliin  the  sub- 
groupjhcrc  are  laborers  nn  the  one  hand,  fimLcppi- 
talists.  on  thp  nthnr,  holpin^rr  ,.n»i-|  ^^i^pr  i^,  ^.^j^^  ^ 

joint  pro(iusL  In  our  table  A'",  B'",  and  C"  are 
the  goods  of  which  the  social  income  is  composed. 
Subgroups,  such  as  A,  A',  etc.,  help  to  make  this 
grand  total  of  finished  goods ;  but  in  A,  A',  and  all  the 
other  subdiyisions  there  are  laborers  and  capitalists 
working  together.  Inarming,  mining,  cotton  spinning, 
shoemaking,  building,  and  a  myriad  of  other  occupa- 
tions all  work  together  to  create  an  aggregate  of  goods 
which  con.stitute  the  social  income.  In  each  of  these 
branches  of  business  there  are  men  and  working  appli- 
^"c^^contTibg^ 
branch  furnishes.  •  ^ 

Distribution  as  an  Analysis. —  The  essential  fact 
about  distribution  is  that  it  is  an  analysis.  It  re- 
verses Ihe .s>:nttxetJcjf^)eration_step  by  step,  resolving 
the  g£andJota[  prod^iicetl  b^^  .sociotxint^ 
sponding  with_thc_amounts  contributed  by  the 
specific  industries,  such  as  mining,  cotton  spinning, 

74 


1  1 


3i>:^>i^  t^ 


L  .  '^  *j'      -,■•■-■1 


PRODUCTION    A    SYNTHESIS 


75 


shoercaking,  etc.    The  men  who  own  and  work  the 
mines  do  not  keep  the  ore  they  secure,  nor  do  they  wish 
to  keep  it.    The  ore  goes  into  a  stock  of  goods  for  the 
general  use  of  society,  and  it  constitutes  a  definite 
addition  to  the  value  of  that  stock.    Asore  itjs  trans- 
muted  into  a  myriad  of  forms,  mprfroH  wifh  ^i\^^^  ^ 
terialg_ajidjost]_but  the  amount  that  it  addatothalatal 
product  of  society  is  definite.    It  is  a  certaiiuiefiiuble 
quantity  of  wealth,  and  tW. qiiantity_QLjKealJiUJie 
producers  of  the  ore  shmMizeliQr  themsplvps     Dis- 
tribution further  resolves  the  share  of  each  particular 
industry  into  final  portions  for  the  use  of  the  labor- 
ers   and   capitalists   in    that   industry;    and   these 
correspond  with  the  amounts  which  these  laborers 
and  capitalists  contribute.    The  result  of  distribution 
is  to  fix  the  rate  of  wages,  the  rate  of  interest,  and  the 
amount  of  the  profits  of  emploj^eig^  such  profits 
exist ;  and  the  general  thesis  which  is  here"  advanced 
and  remamsJo^e^rovedjsjtEat;^^ 
ouTcEanges  and  disturhanc£gI„iL_competition  were 
absolutdyfreejjindiLlaiKaia.nd_ca^ 
that  the  slightest  inducement  would  cause  them  to 
pass  from  one  branch  of  business  to  another/  there 

'  It  will  be  seen  that  we  here  assume  for  the  process  known 
as  competition  a  degree  of  perfection  which  it  does  not  attain 

actual  life.  This  process  would  be  absolutely  free  if  labor 
'  ould  and  would  instantly  abandon  one  industry  and  enter 
another  whenever  it  appeared  that  it  could  create  an  increased 
product  by  so  doing,  and  if  capital  also  moved  with  the  same 
promptness  on  the  smallest  inducement.  In  actual  life  there 
is  friction  to  be  overcome  in  the  making  of  such  transfers, 
and  this  constitutes  one  of  the  subjects  of  the  theory  of  Eco^ 
nomic  Dynamics  and  will  in  later  chapters  be  fully  considered. 

Whenever  either  labor  or  capital  thus  moves  to  a  new 
place  in  the  eroup  sy.Rtem,  it  hrcomes  an  active  competitor 
of  the  labor   or  capital   that  was  already  there.     We  need 


■^'nm 


i^ 


■!%*, 


^^»1!5^ 


76 


ESSENTIALS   OF   ECONOMIC   THEORY 


a  definition  of  the  competing  process.     In  the  case  of  produc- 
ing agents  it  consists  in  a  rivalry  in  selling.    The  laborer 
who  moves  from  A'  of  the  table  that,  in  the  preceding  chapter, 
has  been   used  to  represent   organized  industry  to  B',  offers 
for  sale,  as  some  would  say,  his  service,  or  more  accurately, 
the    product    which    his    labor    can    create.     The    purchasers 
are  the  employers  in  the  subgroup  B',  and  in  order  to  induce 
them  to  accept  the  new  labor  it  is  necessary  to  offer  it  at  a  rate 
of  pay  which  will  make  it  worth  their  while  to  take  it.     If 
the  workers  already  in  this  division  of  the  field  are  getting 
just  what  they  are  worth,  a  larger  force  cannot  be  employed 
at  the  same  rate  of  wages,  because,  for  a  reason  that  will 
later  appear,  the  new  labor  cannot  offer  for  sale  as  large  a 
product  as  an  equal  amount  of  the  labor  that  is  already  there. 
If  the  transfer  to  B'  were  made,  the  new  labor  would  have 
to  accept  lower  pay  than  the  old  has  been  getting,  and  the  old 
labor  would  be  forced  to  accept  a  cut  in  its  rate  of  pay  or  be 
supplanted  by  the  new.      A  rate  sufficiently  low  would   in- 
sure  the  employment  of  all.     If  the  labor  formerly  in  this 
subgroup  has  been  getting  less   than  it  is  worth,  there  will 
ensue  a  competition  among  employers  who  desire  to  realize, 
each  for  him.self,  the  margin  of  profit  which  can  be  made  by 
getting  additional  labor,  and  this  will  either  raise  the  pay 
of  the  men  already  in  this  subgroup  or  call  new  men  into  it, 
or  do  both.     In  any  case  it  will,  in  the  absence  of  all  trace  of 
monopoly  on  the  side  of  the  employers,  end  by  giving  to  the 
men  what  they  are  worth.     It  is,  in  fact,  such  a  bidding  for 
new  labor  by  employers  in  any  branch  of  business  that  moves 
labor   from   point   to   point   in   the   industrial   system.     The 
entrepreneur  is  the  agent  in  the  case,  profits  are  the  lure,  and 
competition  —  rivalry  in  buying  —  is  the  means;    and  com- 
petition is,  as  we  use  terms,  absolutely  free  whenever  it  is 
certain  that  the  smallest  margin  of  net  profit  will  set  it  working 
and  draw  labor  or  capital  to  the  profit-yielding  point. 

There  is  competition  among  the  entrepreneurs  at  A'"  in 
selling  this  finished  product  to  the  consuming  public,  and 
among  different  purchasers  in  buying  it.  Whenever  the 
prire  of  A'"  is  so  high  that  the  whole  output  of  it  cannot  be 
sold,  each  vender  tries  to  supplant  others  and  insure  a  sale  of 
his  own  product  rather  thim  that  of  any  one  else.  Com- 
petiti((n  here  is  overt  and  active.  When  all  can  be  sold  at 
the  current  price,  finding  a  market  for  one  vender's  supply 
does  not  require  that  lie  win  away  another' .s  ru.stomers,  and 
although  the  different  sellers  continue  to  be  rivals  and  each 


PRODUCTION    A    SYNTHESIS 


77 


would  be  no  true  profits '  in  any  business,  and  labor  i  y 
and  capital  wouiu  create  and  get  the  whole  social  I  ^ 
income.     Moreover,  each  .laborer_and  each  capitalist 
would  get  the  amount  of  his  jDcrsonal  cpntrihutionjo 
this  sum  total.     Amid  all  the  complications  of  society 
the  modern  worker  would  be  in  a  position  akin  to  that 
of  the  solitary  hunter  in  a  primitive  forest  —  his 
income  would  be  essentially  of  his  own  making  and 
would  include  all  that  he  makes.     IJe  would  not, 
like  the  primitive  man,  get  the  literal  things  that  he 
fashions,  but  he  would  get  the  amount  of  wealth  that 
he  creates  —  the  value  of  the  literal  products  which 
take  shape  under  his  hand. 
Standards  of  Wages  and  Interest.  —  This  accurate 

would  welcome  an  increase  of  patronage  made  at  others' 
cost,  no  one  is  forced  to  underbid  others  in  order  to  contiiuie 
to  sell  his  accustomed  output.  Competition  is  here  quiescent, 
since  actual  underbidding  and  the  luring  away  of  rivals' 
customers  do  not  take  place.  When  entrepreneurs  who 
are  not  now  in  the  subgroup  A'"  are  ready  to  enter  it  and 
to  become  rivals  of  those  already  there  whenever  any  profit 
is  to  be  had  by  such  a  course,  their  competition  is  not  actual 
but  potential;  and  yet  it  is  a  real  influence  and  serves  to 
deter  producers  already  in  the  field  from  establishing  such 
a  price  for  their  product  that  the  possible  competitors  will 
become  real  and  active  ones.  These  three  influences  may 
conceivably  act  without  obstruction  or  may  b(!  hindered  and 
deprived  of  much  of  their  pov/er.  In  actual  life  they  arc 
subjected  t.o  hindrances,  and  whether  they  shall  hereafter 
insure  a  certain  approximation  to  the  general  state  which 
a  perfectly  free  competition  would  insure  or  whether  the  eco- 
nomic condition  of  the  world  shall  be  permitted  to  drift  far 
from  that  normal  state,  depends  on  the  success  which  gov- 
ernments will  have  in  reducing  or  removing  the  hindrances. 

'  In  this  treatise  the  term  profits  will  be  used  to  designate 
the  net  increase  which  may  remain  in  employers'  hands  after 
paying  the  wages  of  labor  of  every  kind  and  interest  on  all 
capital  used.  The  term  <jro«D  projlLi  describes  a  sum  made 
up  of  this  net  profit  and  interest  on  the  capital. 


n 


78 


ESSENTIALS   OP    ECONOMIC   THEORY 


■  ! 


H[  = 


correspondence   between   men's   incomes   and   their 
contributions  to  the  general  earnings  of  society  would 
exist  only  in  the  absence  of  certain  changes  and  dis- 
turbances which  it  will  be  our  aim,  in  the  latter  part 
of  this  work,  to  study.    These  changes  give  to  society 
the  qualil  /  that  we  shall  term  dynamic,  and  we  shall 
examine  them  at  length.    What  can.  how£X£LJbe 
niirrtnUiL  advnnr»  '«  ^^^^  thft  '•fltps  of  wafrps  a.nd 
jpfpj^t  whirh  w'^■''^^  prpvnil  if  the  changes  and  dis- 
tiirbflncgg_were  entirely  absent  constitute  standards 
toward  which>_iii-spite-x>t-all  the  changes  thflt  are 
goIng]wi7^tual  wages^and  interest  are  continually 
tendiag.    How  nearly  in  practice  the  earnings  of 
labor  and  capital  approximate  the  ideal  rates  which 
perfect   competition   would   establish  is   a  question 
which  it  is  not  necessary  at  this  point  to  raise.    We 
have  to  define  the  standard  rates  and  show  that 
fundamental   forces  impel  the  actual  rates  toward 
them.    The  waters  of  a  pond  have  an  ideal  level 
toward  which  they  tend  under  the  action  of  gravity; 
and  though  a  gale  were  to  force  them  to  one  end  of  the 
pond  and  cause  the  surface  there  to  stand  much  higher 
than  the  surface  at  the  other  end,  the  standard  level 
would  be  unaffected  and  the  steady  force  of  gravity 
would  all  the  while  be  drawing  the  actual  surface 
toward  it.     In  our  study  of  Economic  Dynamics  we 
shall  encounter  influences  which  act  like  the  gale  in 
the  illustration,  but  at  present  we  are  studying  what 
is  more  akin  to  gravity  —  a  fundamental  and  steady 
force   drawing   wages   and   interest   toward   certain 
definable  levels.    Ia_Qur_present  study  of  Economic 
Statics  we  must  seek  to  discover  how  these  standards 
are  fi.xed,  in  the  midst  of  the  overturnings  which 
industrial  society  undergoes. 


11,  i  * 


!»•■■ 


PRODUCTION 

A    SYNTHESIS 

A'"                B'" 

C"                H'" 

A"            B" 

C"            H" 

A'             B' 

C             H' 

A              B 

C              H 

79 


'.   f!.        !| 


We  have  already  represented,  in  a  highly  simpHfied 
form,  the  synthesis  by  which  the  goods  which  make 
up  the  income  of  society  are  produced.  A,  H,  and  C 
represent  different  raw  materials,  and  they  arc  changed 
by  a  series  of  transmutations  into  A'",  B'",  and  C", 
which  stand  for  all  the  consumers'  goods  that  the 
society  uses.  They  represent  food,  clothing,  furnish- 
ings, vehicles,  and  countless  means  of  comfort  and 
pleasure. 

The  Makipg  of  Acfivp.  IiiRfrumpn^fs  nf  Prodmtjm  — 
It  is  necessary  always  to  have  and  use  a  stock  of 
tools,  machines,  buildings,  and  other  active  instruments 
of  production;  and  as  these  wear  out  in  the  using,  it 
is  necessary  that  there  should  be  persons  who  occupy 
themselves  in  keeping  the  stock  replenished.  Under 
a  system  of  division  of  labor  there  would  be  special 
industries  devoted  to  the  making  of  new  appliances  of 
production  to  take  the  place  of  those  which  are  worn 
out  and  discarded,  and  also  to  make  repairs  on  those 
which  are  still  in  use.  For  illustration,  we  may  let 
the  symbol  H'"  represent  all  active  capital  goods 
that  the  society  uses,  the  various  raw  materials  which 
enter  into  such  active  goods  being  represented  by  H 
and  the  partly  made  instruments  by  H'  and  H". 
If  the  stock  of  appliances  is  not  growing  larger,  just 
enough  of  the  articles  IF"  are  made  to  replace  the 
discarded  ones.  No  producer  gets  new  machinery, 
but  every  one  keeps  his  stock  intact. 

The  Simplified  Representation  Correct  in  Principle.  — 
We  have  now  a  very  simple  representation  of  what 


if 


80 


ESSENTIALS   OF    ECONOMIC   THEORY 


J 


i  > 


i 


I  * 


!' 


actually  goes  on  under  the  name  of  the  division  of 
labor,  and  yet  the  representation  is  in  essential  points 
accurate.     In   reality  a   very  detailed  and   minute 
division  and  subdivision  of  industries  takes  place  and 
the   varieties  of  goods   produced   are   innumerable. 
Society,  as  a  whole,  is  making  the  most  highly  com- 
posite product  that  can  be  conceived ;  namely,  con- 
sumers' wealth  in  its  countless  forms.     Each  of  the 
grand  divisions  of  society  —  the  general  groups  that 
we  have  represented  by  the  scries  of  A's  or  of  B's  — 
makes  a  complete  article;    but  even  that  is  in  its 
own  way  far  more  composite  than  the  symbol  indi- 
cates, for  it  is  apt  to  contain  several  kinds  of  raw 
material  and  to  be  made  up  of  a  large  number  of 
distinct  utilities,  each  of  which  has  its  own  set  of 
producers.    This  complexity  of  the  process  of  pro- 
duction does  not  change  the  principle  of  distribution, 
by  which  the  product  is  virtually  analyzed  into  its 
component  elements  and  the  value  of  each  element  is  j 
assigned  to  those  who  create  it.    This  principle  can 
be  clearly  represented  by  assuming  that  each  subgroup 
has  one  distinct  utility  to  create  and  that  it  takes 
only  four  of  these  to  make  an  A'",  a  B'"  or  a  C". 

A^Rynthp.'ii^  imthirt  Knrh  >S?ibt/rQm).  —  There  is 
within  each  subgroup  a  synthesis  going  on,  and  this 
also  may  be  complex.  Labor  and  capital  dig  ore 
from  the  ground  —  an  unusually  simple  process ;  and 
yet  there  are  several  distinct  operations  to  be  per- 
formed before  the  ore  is  ready  for  smelting.  When  it 
comes  to  fashioning  the  metal  into  useful  shapes,  the 
operations  become  very  numerous  and  require  many 
subordinate  trades  even  for  the  making  of  one  product. 
How  many  mechanical  operations  go  to  the  making 
of  a  bicycle,  an  automobile,  or  a  steam  yacht  ?    Too 


1V" 

if 


PRODUCTION   A   SYNTHESIS 


81 


many  to  be  represented  in  any  table,  but  not  enough 
to  change  at  all  the  principle  according  to  which  those 
who  help  to  make  one  of  these  composite  products 
are  paid  according  to  their  contributions  to  it.     We 
may  consider  that  all  the  work  that  is  done  in  one  kind 
of  mill  creates  one  utility.    Though  there  arc  many 
subtradcs  in  making  a  shoe  and  many  more  in  making 
a  watch,  we  may  proceed  as  though  there  were  only 
one  transformation  of  the  raw  material  required  in 
each  case.     We  may  let  the  division  between  the 
contiguous  subgroups  be  made  commercially  rather 
than  merely  mechanically,  and  regard  the  establish- 
ments that  buy  material  and  sell  it  in  a  more  highly 
wrought  condition  as  moving  it  forward  by  one  stage 
on  the  road  to  completion,  however  many  changes 
they  may  have  made  in  it  in  the  different  departments 
of  their  several  mills.     The  difference  between  shoes, 
on  the  one  hand,  and  the  leather  and  findings  of  which 
th(>y  are  made,  on  the  other,  thus  passes  for  one  utility 
A  manufacturer  of  shoes  puts  his  leather  and  findings 
through  many  operations  before  he   has  shoes  for 
sale;   but  it  is  convenient  to  call  all  that  the  manu- 
facturer imparts  to  these  raw  elements  before  he  makes 
them  over  in  their  new  form  to  the  merchant,  one 
subproduct. 

Curtfier  Complexities  which  m(iJLbe__DisreQarded.  ~ 
One  man  may  be  in  several  of  the  general  groups 
It  is  possible,  for  example,  that  he  may  furnish  raw 
materials  which  enter  into  more  than  one  finished 
article.  Iron  is  so  extensively  used  that  it  goes  into 
more  products  than  can  easily  be  counted.  The  man 
who  ihgs  iron  ore  contributes  to  the  making  of  bridges 
rails,  locomotives,  buiMings,  machines,  ships,  and 
tools  m  indefinite  number  and  variety.     The  price 


1-4   -d 


;   J 


:  -~\) 


fv 


82 


ESSENTIALS  OF  ECONOMIC  THEORY 


of  each  of  the  articles  into  which  any  of  this  material 
goes  contains  in  itself  the  price  of  that  part  of  the  raw 
material  which  goes  into  it.    There  is  steel  in  a  ship, 
and  the  maker  of  that  part  of  the  output  of  raw  steel 
which  goes  into  a  ship  gets  his  pay  from  the  price  of 
the  vessel;   and  so  with  the  crude  metal  which  goes 
into  a  bridge,  a  building,  an  engine,  etc.     What  the 
producer  of  a  material  gets  from  each  source  tends, 
un3erj)erfectly  free  competition,  to  equal  in  amount 
what  he  contributes  toward  the  value  of  the  corre- 
sponding-axticle.     In  terms  of  our  table  a  miner  may 
furnish  ore  from  which  iron  is  taken  for  the  making 
of  both  JV'"  and  B'" ;  and  if  so,  when  the  distributive 
process  analyzes  these  products  into  their  elements, 
the  value  of  what  he  has  in  each  case  contributed 
will  fall  to  him.     He  will  be  paid  according  to  the 
help  he  has  afforded  in  the  making  of  the  A'"  and  the 
B'",  and  tV^  f^^pf.  Hnf.p  nnt.  fhanpft  in  principle  the 
manner  in  which  the  income  of  society  is  divided. 
If  the  man  helped  to  make  only  one  thing,  he  would  get 
a"Wrt  oniiel>riceof  that  one  thing ;  but  if  he  helps 
to  make  several,  he  will  get  a  part  of  the  price  of^ch 
of  JJifiia^    Each  group  has  one  grand  function  to 
perform,  such  as  the  making  of  an  A'",  and  if  the 
man  helps  in  more  than  one,  and  is  paid  accordingly, 
his  total  pay  is  according  to  the  amount  he  produces 
in  all  the  different  functions  he  performs,  and  the 
principle  of  distribution  works  as  perfectly  as  it  would 
if  the  man  were  confined  to  the  single  subgroup  A. 
For  simplicity  we  assume  that  he  is  so. 

The  Functions  of  Capitalist,  Laborer ^  and  Entre- 
preneur  often  perjormed  by  One  Person.  —  One  person 
may  perforin  several  functions,  not  only  by  contribut- 
ing to  the  products  of  several  groups,  but  by  con- 


p.^^^ 


f^ 


PRODUCTION    A   SYNTHKSIS 


83 


tnbutmg  in  more  than  one  way  to  the  product  of 
one  subgroup.  He  may,  for  example,  both  labor 
and  furni-sh  capital,  and  he  may,  further,  perform 
a  special  coordinating  function  which  is  not  labor, 
in  tiie  technical  sense,  and  scarcely  involves  any  con- 
tinuous personal  activity  at  all,  but  is  essential  for 
rendering  labor  and  capital  protluctive.  What  this 
function  is  we  shall  presently  see.  We  shall  term 
It  the  function  of  the  entrepreneur,  using  this  term  in 
an  unusually  strict  way.  We  shall  keep  this  function 
quite  distinct  from  the  work  of  the  superintendent  or 
manager  of  a  business. 

How  Much  the  Term  "Labor"  Covers.  — We  in- 
clu_de  under  thfi  torin  labor  all  effort,  ovp.n.lo,nTr^ 
routincway  in  carrying  on  biisirm.«     The  overseers 
111   the   tH^s,   the   bookkeepers,   clerks,  secretaries 
treasurers,  agents,  and,  in  short,  all  who  perform  any 
of  the  labor  of  management  for  which  they  get  or  can 
get  salaries  are  laborers  in  the  comprehensive  sense 
in  which  we  use  the  word.     It  comes  about  that  the 
employer  usually  labors;  for  he  does  the  highest  and 
most  responsible  work  in  his  own  mill  or  shop.     It 
IS  not,  however,  in  his  capacity  as  entrepreneur    or 
"undertakerr  that  he  labors;  for,  as  the  entrepreneur 
properly  speaking,  he  employs  and  pays  for  all  the 
work    that    receives    a    stipend.     He    may    employ 
himself,  indeed,  and  set  aside  a  stated  sum  to  pay 
his  own  salary;   but  this  means  that  in  his  capacity 
as  entrepreneur  he  needs  a  good  manager  and  hires 
himself  to  act  in  that  capacity.     Scrupulous  fidelity 
IS  the  most  important  quality  that  a  manager  can 
possess,  and  the  employer  can  always  trust  himself 
to  possess  it  so  long  as  it  is  his  own  interests  that  he 
controls. 


!i 


i 


I' 


f*w 


84 


ESSENTIALS   OF    ECONOMIC   THEORY 


'I. 


h^ 


r 


Entrepreneur  and  Capitalist.  —  In  the  same  way 
we  include  in  the  capital  of  an  establishment  whatever 
invested  funds  the  employer  himself  supplies,  as  well 
as  what  he  hires  from  others.  Here  again  a  man  is 
likely  to  siTve  in  more  than  one  capacity,  for  as  an 
entrepreneur  he  hires  capital  and  as  a  capitalist  he 
lets  it  out  for  hire,  so  that  in  the  one  capacity  he  hires 
capital  from  himself  acting  in  the  other  capacity. 
The  man  "puts  money"  into  his  own  business  and 
gets  interest  for  the  use  of  it. 

The   Differepf    Funrtinns    of  the    '^"'f?f    Mfir    ^'■•''•- 
timp^f^^TZTnuxinesH.  —  This   distinction   between 
the  different  functions  thajmir  person  may  pf^rform 
is  not  a  mere_refinement  of  theory,  hilt  is  something 
that  is  recognized  in  bnsip^^>^  and  has  great  practical 
importance.     In  a  corporation  officials  who  are  also 
stockholders  receive  salaries  that  are  usually  reckoned 
on  the  basis  of  the  amount  that  they  could  get  in  the 
market  if  they  were  to  enter  the  employment  of  other 
corporations  and  do  the  same  kind  of  work  they  are 
now  tloing.     Favoritism  may  give  them  considerably 
more  than  this  amount,  but  even  then  this  amount  is 
the  basis  of  the  calculation  which  fixes  their  stipend. 
If  they  are  paid  more  than  their  work  is  worth  to 
their  own  corporations,  what  they  get  h  something 
besides  wages  or  any  other  normal  and  legitimate 
income.     If  ihey  accept  for  their  time  less  than  they 
are  worth,  th  -y  make  a  donation  to  the  corporation. 
Neither  filching  something  for  nothing  out  of  the 
returns  of  the  corporation,  nor  giving  it  a  gratuity, 
is  to  be  here  assumed  as  existent,  since  we  are  not 
dealing   with   the   phenomena   of   quasi-plunder   or 
eccentric   benevolenci-.    Tiie  character  of  wages  of 
management,  as  the  reward  for  a  high  grade  of  labor, 


W7^^ 


PRODUCTION   A   SYNTHESIS  ,S5 

is  rpcognizpd  in  business  life,  and  the  salary  of  the 
manager,  whether  he  is  a  stockholder  or  not,  is  usually 
expressed  in  a  definite  sum  of  money  and  is  gauged 
crudely  or  accurately,  according  to  his  value  as  a 
servant  of  the  company. 

Dividends  often  Composite.  ~  In  like  manner  ilJa. 
iiggortantjruhejookkeeping  of  a  company  to  ascer- 
ta'n  how^ucToniu^return  to  the  .stockholders 'is 
mej:ely  interest  on  the  eapjtni  tllcyJiaBOhemg^es 
mYe,^tcd.andJiow  much  is  truej)rofit,j)i^the  net  gain 
which  IS  over  and  above  inrerest.  hTbU^hi^gg  life 
a  distinction  is  pretty  clearly  maintained  between 
the  three  kinds  of  income  that  have  bt^en  described- 
namelj(,/>he  reward  of  labor  in  all  its  form^he 
Tjjjvard  of  capital,  going  to  whoever  furnishes  it'  and 


^e  reward  oi  a  coordinating  function,  or  the  function 
of  hiring  both  labor  and  capital  and  getting  whatever 
■  their  joint  product  is  worth  above  the  cost  of  the 
elements  which  enter  into  it.  This  essentially  com- 
mercial margin  of  returns  from  production  above  all 
costs  of  production  is  profits  in  the  strict  sense  and 
would  be  nonexistent  in  an  absolutely  static  industry 
It  comes  into  existence  in  consecjuence  of  the  changes 
with  which  social  F:conomic  Dynamics  deals. 

Three  Income_ssntirelriDhiinct. -  Wages,"  interest, 
^Iii££2&t£;.then,  are  the  three  incomes  that  we  shall 
distmiTuisTi.  We  shall  keep  profits  completely  sepa- 
rated from  the  wages  of  any  kind  of  labor  and  from 
the  interest  on  any  kind  of  capital.  This  income 
falls  to  the  ^jMirjyremm^^j^thor^^  called  "thTlT^TiT;: 
taker,  or  the  employer  anfl  rnnrdinatflrj)nabgr  and 
ca^itaj^aiuUiLconu^s^onlj^^  the  product  of  the 
ORc_ratlons  carried  mn^TTF^stablj^^  exc;;^drRll 
wages  and  all  intercsyhat^he  HrsITj;^ ■ 


I 


■It' 
■A* 


'    r 


1^ 


It     f    ;■ 


* 


'  T^,. 


ii  >■ 


'%  a 


, 


i! 


ifi' 


«     -     IP  ■ 

I      1 
\     1 


I     « 
.1      1 


1  i  i 


86  E88ENTIAU3  OF   ECONOMIC  THEORY 

Haw  a  Man  could  be  an  Entrepreneur  Only.  —  If  a 
/man  should  hire  all  the  capital  that  he  needs  in  a 
business  and  also  all  the  labor,  including  the  labor  of 
every  man  in  the  office  force,  and  reside  thereafter 
in  a  distant  country,  holding  no  consultations  with  his 
managers,  whatever  income  he  might  get  would  be 
purely  an  entrepremur's  profit.      It  would  not  be 
interest  —  for  that  amount  would  have  to  be  paid 
to  the  men  who  had  loaned  the  capital  — and  it 
would  not  be  wages -for  they  would  have  to  be 
made  over  to  the  men  actually  doing  the  work.    The 
absent  entrepreneur  would  be,  in  the  eye  of  the  law, 
the  purchaser  of  all  the  elements  which  go  into  the 
product,  since  all  the  purchases  are  made  in  his  name. 
The  managers  are  only  his  agents,  and  when  they  buy 
raw  materials  or  supplies  for  the  mill,  they  buy  them 
for  him  and  by  his  authority,  and  he  is  under  the  obli- 
gation to  pay  for  them.    Moreover  paying  wages  is, 
in  reality,  buying  the  share  which  labor  contributes 
to  the  product  of  the  mill.    The  workmen  have  a 
natural  right  to  the  value  which  their  work,  of  iti^elf 
and  ande  from  the  aid  fumhhed  by  others,  imparts 
to  the  material  that  is  put  into  their  hands,  and  when 
they  sell  their  labor,  they  are  really  selling  their  part 
of  the  product  of  the  mill.     In  like  manner  paying 
interest  is  buying  the  share  which  capital  contributes 
to  the  product.    The  owners  of  the  capital  have  an 
original  right  to  what  the  machines,  the  tools,  the 
buildings,  the  land,  and  the  raw  materials,  of  them- 
selves and  apart  from  other  contribution^ ,  put  into  the 
joint  product.     In  reality  they  sell  this  share  for  a 
consideration  in  the  form  of  interest.     In  a  static 
state  labor  and  capital  together  croate  the  whole 
product  of  the  mill;  wages  and  interest  are  the  prices 


PRODUCTION   A  SYNTHESIS 


87 


that  they  get  for  their  several  contributions,  and  the 
entrepreneur  pays  these  purchase  prices  and  by  virtue 
of  this  becomes  the  owner  of  the  whole  product. 
Having  the  product,  he  sells  it  in  the  market  for  what 
he  can  get.  If  this  were  more  than  the  cost  to  him  of 
all  the  elements  that  have  gone  into  it,  he  would  have 
a  net  profit  remaining.  It  would  be  a  remainder 
accruing  to  the  owner  and  seller  of  the  product  after 
the  costs  of  getting  a  title  to  it  have  been  defrayed. 
Whether  the  absent  entrepreneur  of  our  illustration 
gets  anj'thing  from  his  business  or  not  depends  on 
the  question  whether  such  a  remainder  of  returns 
above  costs  is  afforded. 

Profits  Nil  in  a  Static  Society.  —  We^shall  see  that  )  1 
if  labor  and  capital  nan  mnvo  nt^.,t~rn  _the.jystem  /  / 
of  groups  so  freely  that  each  agent  is  as  productive! ' 
'"  Q"g.PJj^gg  a,s  it  is  in  another,  there  will^be  no  prod-(  i 
uct  anywhere  in  excess  nf  wagggjir'-dJllW^  Eabor 
and  capital  then  create  and  claim  for  themselves  the 
whole  output  of  thnir  inflngfrina — When  the  entre- 
preneur has  given  them  their  shares,  by  paying  wages 
and  interest,  and  has  paid  for  raw  materials,  he  has 
nothing  left.  In  actual  business  competition  is  often 
sharp  enough  to  prevent  men  from  getting  more  than 
interest  on  their  capital  and  a  fair  return  for  the 
labor  they  spend  in  directing  their  business;  and  pure 
theory  here  assumes  that  competition  is  always  and 
everywhere  sharp  enough  to  do  this.  It  is  ideally 
efficient.  Labor  and  capital  are  ideally  mobile  and 
ready  to  flow  at  once  to  the  points  where  any  net 
profits  can  be  made.  Such  a  condition  implies  that 
society  is  in  a  static  state,  and  we  shall  see  what  (his 
condition  is.  It  implies  an  absence  of  organic  change 
in  society.    The  great  collective  producer  does  not 


4    V     '    ^1 


At 


i 


H' 


VI 


h 


ESSENTIALS   OF   ECONOMIC   THEORY 

alter  either  its  form  or  its  mode  of  producing  wealth. 
Industry  goes  on,  indeed,  but  it  goes  on  in  a  change- 
less way.    Reserving  the  full  description  of  this  state 
for  a  later  chapter,  we  note  here  that  the  adjustment 
which  would  theoretically  bring  a  society  to  such  a 
state  would  preclude  all  gains  for  its  entrepreneurs.^ 
The  Merging  of  Functions  Desirable.  —  The,  uniting 
in  one  person  of  the  functions  of  capitalist,  laborer, 
and  entrepreneur  contributed  much  to  thejitpductiv- 
it.ynfjjje  small-shop  system  of  formgiLjiays.    The 
man  who  had  a  few  thousand  dollars  invested  in  a 
little  shop  and  employed  a  few  men  to  assist  him  got 
three  differont  kinds  of  income,  and  the  sum  of  the 
three  was  larger  than  anything  ho  coukl  have  secured 
if  he  had  b*^en  only  a  laborer  or  only  a  small  capital- 
ist and  entrepreneur.    He  worked  harder  and  more 
intelligently  than  a  hired  superintendent  would  have 
done;  he  was  led  to  be  cautious  because  his  own  capi- 
tal was  risked  in  his  business,  and  yet  he  was  spurred 
to  enterprise  by  the  fact  that  when,  by  virtue  of  the 
influences  which  we  call  dynamic,  profits  were  made, 
he  got  them.    Even  in  the  largest  corporations  the 
same  conditions  contribute  to  success,  and  it  is  best 
that  managers  should  be  owners  of  some  part  of  the 
capital  which  they  handle  and  receivers  of  some  por- 

'  The  preceding  paragraphs  may  seem  to  show  that  if  an 
entrepreiKur  ever  gets  an  income,  he  does  it  by  wresting  from 
labor  and  capital  a  part  of  their  prodtiets.  We  shall  see  that 
in  dynamic  industry  there  is  a  normal  way  in  which  he  may 
get  an  income  without  taking  anything  from  the  incomes 
that  labor  and  capital  would  get  if  he  did  not  perform  his 
part.  His  return  may  come  from  the  result  of  an  enabling 
act  which  he  performs,  »vhercby  both  the  labor  and  the  capital 
of  a  particular  tmbgroup  become  mr-.r^  productive  than  other 
labor  and  capital  are  and  more  so  than  they  would  be  if  the 
entrepreneur's  enabling  act  were  not  performed. 


£?^i^^^ 


}&^M. 


'•■^^' 


PRODUCTION    A   SYNTHESIS 


89 


If-    '5*ir;^ 


.  tion  of  the  profits  which  they  try  to  secure  for  their ) 
\  companies.  Where  competition  is  sharp,  companies 
directed  by  their  owners  may  supplant  those  of  which 
the  direction  is  given  over  to  hired  managers.  The 
growth  of  corporations  does,  however,  tend  to  put 
salaried  men  more  and  more  into  controUing  positions 
and  to  reduce  the  power  of  the  body  of  stockholders, 
who  perform  a  joint  function  as  capitalists  and  entre- 
preneurs. In  itself  this  tends  to  reduce  profits  and  i 
detracts  from  the  advantages  which  the  incorporation 
of  a  business  offers. 

Distrihuiinn.  primarily  Fnnrfignal  rather  tlumj^er- 
SQml.  —  Where  men  get  incomes  that  are  composed 
ot  wages,  interest,  and  profits,  economic  science  should, 
in  the  first  instance,  tell  us  how  the  rates  of  wages 
and  interest  and  the  amount  of  profits  are  determined. 
A  study  of  the  static  laws  of  distribution  concerns 
itself  with  the  reward  of  labor  as  such,  and  the  revvrrd 
of  capital  as  such,  while  a  study  of  dynamics  takes 
account  of  pure  profits.  When  we  know  what  the 
rates  of  wages  and  interest  are,  we  can  tell  what  any 
capitalist-manager  should  have  by  knowing  how  nuich 
capital  he  furnishes  and  how  much  and  how  well  he 
works  as  a  manager.  If  the  business  is  yielding  a 
net  profit,  over  and  above  the  interest  on  its  capital, 
we  can  tell  what  part  of  this  net  income  any  one 
stockholder  will  get  —  in  the  form  of  a  rate  of  divi- 
dends in  excess  of  the  rate  of  interest  —  if  we  know 
how  much  of  the  common  stock  of  the  company  he 
owns.  His  personal  income  depends  on  the  incomes 
attaching  to  the  functions  he  performs.  The  science 
of  distribution  ^hould  tell  us  primarily,  not  what  any 
man  personally  gets  as  a  total  income  and  how  well 
off  he  is  as  compared  with  other  men,  but  in  wliat  way 


1 


it^^ 


^.I'^V'jiffiv 


90 


ESSENTIALS  OF   ECONOMIC   THEORY 


i*  ." 


I 


■'  I 


the  wages  of  his  labor,  the  interest  on  his  cap'  al,  and 
thereTurn  for  t\\e~entrepreneur's  function  art  fixed. 
In  technical  terms  this  is  saving  that  di'itribiit4f>n  i'l 
primarily  functional  and  not  personal.  Certain  forces 
a.s.s2gn  cprt,ain  rewards  to  different  functions  which  are 
involved  in  the  creatingof  wealth,  and  the  science  f 
distflB'utic>n~tcIIi~us  how  these  forces  work  —  tells 
us,  in  short,  how  wages,  interest,  and  true  profits  arc, 
irTflnd  nf  thomsplvps  Hptprmlao4  Tf  any  man  works 
and  gets  wages,  that  part  of  his  income  will  be  deter- 
mined by  the  wages  law.  If  he  furnishes  capital,  a 
second  part  of  his  income  will  be  determined  by  the 
interest  law.  If  he  also  coordinates  labor  and  capital, 
whatever  he  may  thus  gain  is  determined  by  the  law 
of  profit.  Economic  science  has  to  ascertain  and 
"t-'te  what  these  three  laws  are,  though  in  its  static 
''i\jion  it  has  only  to  account  for  two  of  them. 

Costs  as  well  as  Gains  Apportioned.  —  The— term 
distribution,  as  commonly  used,  denotes  a  division  of 
the  gflinj  oMndiistry;  hut,  as  vvp  hnvn  .t^aid.^jWp^rP 
sacrifices  which  have  to  be  home  in  gettinp;  thejraina, 
and  thesg  a]so_jiavc  to  be  shared.  Wealth  benefits 
men  in  the  using,  but  puts  burdens  upon  them  in  the 
making;  and  when  all  society  does  the  making,  it 
has  to  apportion,  in  some  way,  not  only  the  benefits 
but  the  burdens.  We_shall  take  account  of  these 
sacrifices  becausg  nf  the  relation  thaf  t.hpy  hea£_l£t  the 
gains.  They^  ^  n  ultimate  check  on  proHiipt.ion 
Men  would  go  on  producing  indefinitely  if  the  opera- 
tion cost  them  nothing,  since  it  would  always  bt  agree- 
able 10  have  a  further  income ;  but  they  neces.  arily 
encounter  pains  and  sacrifices  that,  sooner,  or  kxr, 
bring  the  enlargement  of  their  incomes  to  an  end. 
Much  that  is  of  importance  occurs  at  that  critical 


PRODUCTION   A   SYNTHESIS 


91 


1 


point  where  the  sacrifices  of  production  put  an  end 
to  the  extension  of  it.  It  is  the  positive  fruits  of 
production  that  we  have  first  to  consider;  and  what  in 
this  connection  we  wish  first  to  know  is  how  wages  and 
interest  are  determined  when  industry  is  carried  on 
in  a  social  way  and  under  a  system  of  competition. 
We  shall  find  that  these  incomes  are  always  tending 
toward  standards  which  they  would  reach  if  society 
were  in  the  state  which  we  have  described  as  static. 
How  they  are  forced  away  from  their  standards  by 
the  changes  and  disturbances  of  actual  life,  and  how 
the  standards  themselves  change  with  social  develop- 
ment, will  be  the  subject  of  the  latter  part  of  this 
treatise. 


M 


'f'fi? 


IV 


rrftc:-'',! 


CHAPTER  VI 


m 


VALUE  AND   ITS  RELATION   TO   DIFFERENT  INCOMES 

Fiuiciioiaa. — diBtribution controls    personal    in- 

comcs  since  each  man  who  gets,  in  a  iiortnal  way^  any 
income  at  all  performs  one  or  more  productive  func- 
tions, and  his  total  income  is  the  sum  of  the  returns 
for  tlipse  gpvoral  fiinr-t.inns,  Moreovcr  Under  such  a 
condition  of  ideally  perfect  competition  as  we  have 
assumed  each  of  these  functions  is  rewarded  accord- 
ing to  the  product  that  it  creates  ;  and  each  man 
accordingly  is  paid  an  amount  that  equals  the  total 
product  whiiih  he  personally  creates.  Men's  products, 
even  in  the  disturbed  conditions  of  actual  life,  set  the 
standards  to  which  their  returns  tend  to  conform, 
though  they  vary  from  them  in  ways  that  we  shall 
not  fail  to  notice. 

Group  Distribution.  —  The  grand  total  of  the  social 
income  has  to  go  through  a  preliminary  division  be- 
fore it  is  shared  by  laborers,  capitalists,  and  entre- 
preneurs. In  each  industry  the  pay  of  all  these 
functionaries  cornoL.  from  the  selling  price  of  the  com- 
mercial article  thui  they  cooperate  in  making.  The 
price  of  shoes  pays  all  shoemakers,  whether  what  they 
contribute  to  the  manufacturing  is  labor,  capital,  or 
mere  coordination;  and  it  also  pays  ranchmen  and  tan- 
ners for  what  they  contribute  in  the  shape  of  leather 
raw  and  dressed.  If  the  price  of  shoes  should  rise, 
there  would  be  a  larger  income  for  the  group  whose 
activities  create  them.    So  if  woolen  clothing  were 

92 


^^J^'1^^. 


VALUE   AND   ITS    RELATION   TO    INCOMES 


93 


to  become  dearer,  there  would  be  more  money  for  the 
group  that  makes  it,  and  this  would  include  those  who 
raise  sheep  and  those  who  convert  wool  into  cloth, 
as  well  as  the  garment  makers  themselves.  The 
question,  what  members  of  a  group  would  get  the  bene- 
fit of  a  rise  in  the  price  of  its  product,  is  one  that  must 
be  discussed  in  connection  with  economic  dynamics, 
and  we  shall  find,  when  we  reach  this  part  of  the 
subject,  that  it  is  entrepreneurs'  gains  which  come 
largely  from  sources  like  this.  We  have  already  seen 
that,  in  a  static  condition  and  with  prices,  wages,  and 
interest  immovably  held  at  rates  to  which  perfectly 
free  competition  would  bring  them,  entrefrreneurs  as 
such  would  get  nil,  and  the  whole  price  of  every  article 
would  be  distributed  among  the  laborers  and  the 
capitalists  who  make  it.  The  proof  of  this  will 
appear  when  we  have  examined  the  process  by  which 
the  values  of  goods  are  adjusted,  and  this  will  help 
to  prepare  the  way  for  a  study  of  the  sources  of  net 
profits,  which  are  an  all-important  feature  of  actual 
business.  Society  is  honest  or  dishonest  according 
as  this  entrepreneurs'  income  is  gained  in  one  way 
or  in  another ;  and  it  is  not  too  much  to  say  that  be- 
fore the  court  of  last  resort.,  the  body  of  the  people, 
no  system  of  business  will  be  allowed  permanently 
to  stand  unless  the  basic  principle  of  it  tends  to  elimi- 
nate dishonest  profits.  A  chief  purpose  of  static 
studies  is  to  afford  a  means  of  testing  the  legitimacy 
of  the  incomes  that  come  to  entrepreneurs. 

Market  Price.  —  The^nld  phrase  supphf  and  de- 
mand  describcsthc_  process  by  whifh  the  market 
prifP  m  nnythijpp;  ^T^^oform;nnf^  The  total  mercan- 
tile stock  nf  goods  of  a  particiil.ar  kind  .at  any  one  time 
on  hand  is,  of  course,  an  exact  quantity,  and  the  law 


1' 
■  I 

y 
I 

i: 

,  ^■ 
I  ■ 

if 

i:: 


v\  ■     r 


t  i  >^ 


< 

ki 

\      : 

\ 

# 

i 

\h,:^Mlti 


•.^ 


94 


ESSENTIALS   OF   ECONOMIC   THEORY 


I  U  t 


I 


f  ft 


^ 


of  "market  value,"  when  these  words  are  used  in  a 
restricted  and  technical  sense,  determines  the  price 
at  which  this  predetermined  amount  can  be  sold. 

How  a  Normal  Supj^ly  is  Determined.  —  This 
present  stock,  however,  was  brought  into  existence 
by  protlucers  who  looked  forward  to  the  time  when 
they  could  probably  sell  it  at  a  certain  price ;  and  the 
higher  this  anticipated  return  for  the  article,  the  more 
of  it  they  were  induced  to  make.  The  |)rice,  which 
to-day  depends  on  the  quantity  on  hand,  acted  in 
advance  as  a  lure  to  bring  that  quantity  into  existence, 
and  among  the  different  articles  which  men  can  pro- 
duce, they  are  forever  singling  out  for  increased  pro- 
duction those  things  which  offer  the  strongest  lures  — 
that  is,  the  things  that  sell  for  the  largest  amounts  as 
compared  with  the  cost  of  making  t'  em.  The  ultimate 
tendency  of  all  this  is  a  certain  adj  ustment  of  the  relative 
sup"pliesof  different  connnodities.  It  is  that  adjustment 
which  brings_all  prices  to  a  level  determined  by  cost. 

Natural  Value.  —  This  tendency  toward  cosLcnces 
—  those  whicli  afford  to  the  producers  wages  for 
all  their  labor  but  no  true  entrepreneurs'  j)rofit  — 
establishcg^a  further  law,  that  of  "  iiRtiiml  valiip," 
and  this  it  is  that  fixes  the  standard  to  which,  in_the 
long  run,  market  values,  as  adjusted  by  supply  and 
demand,  tent!  to  nonforriL  A  market  value  is  natural 
or  unnatural  according  as  it  does  or  does  not  conform 
to  a  certain  standard,  and  this  ultimate  standard 
itself  is  the  cost  of  producing  the  several  kinds  of  goods. 
What  the  term  cost  in  this  connection  really  means 
we  must  later  see;  but  for  the  present  we  may 
take  the  common  and  practical  view  that  it  is  the 
amount  of  money  that  an  entrepreneur  must  pay 
out  in  order  to  bring  the  article  into  existence.    If 


VALUE   AND   ITS   RELATION   TO   INCOMES 


95 


there  were  very  little  wheat  in  the  granaries  of  the 
world,  demand  acting  on  this  limited  supply  would 
determine  the  selling  price  of  it,  and  this  price  would 
be  high  as  compared  with  the  cost  of  raising  this  grain. 
It  would  also  be  higher  than  tlie  selling  prices  of  other 
things  which  are  proiluced  by  the  same  expenditure 
of  labor  and  capital  that  has  to  be  made  in  raising 
the  wheat.  The  market  price  would,  for  the  time 
being,  be  unnatural  and  would  in  due  time  be  brought 
down ;  but  this  would  have  to  be  done  by  the  raising 
of  more  wheat.  In  other  words,  though  the  selling 
price  of  a  small  supply  of  wheat  may  be  normal  for 
that  amount,  the  amount  supplied  is  itself  abnormally 
small,  and  in  view  of  that  fact  the  resulting  price  is 
too  high  to  be  allowed  to  continue.  As  a  permanent 
price  it  would  not  be  natural.  The  quantitv  supplied 
tends  to  increase  till  the  market  price  conforms  to 
the  cost  of  raising  the  wheat.  We  have  to  see,  first, 
how  demand  fixes  the  price  of  a  definite  amount  of 
anything  which  is  offered  for  sale  and,  later,  how  the 
quantity  offered  is  controlled. 

How  Prices  are  Determined.  —  It  is  certain  that  if, 
in  a  given  market,  we  increase  J,he  quantity  of  goods 
that^  are  to  be  sold,  we  lower  the  price,'  while,  if  we 

'  The  term  market,  as  used  in  this  disrussina,  means  a  local 
area  within  which  goods  of  given  ki  ids  are  bought  and  sold; 
and  for  different  purposes  we  may  make  the  area  small  or 
large.  For  some  purposes  it  is  necessary  to  take  a  '  world 
market"  into  consideration,  while  for  others  it  is  desirable 
to  include  only  that  part  of  the  world  within  which  com- 
petition is  very  active  and  within  which  also  goods  and  per- 
sons move  freely  and  cheaply  from  place  to  place.  A  single 
country  like  the  United  States  affords  a  market  large  enough 
to  illustrate  the  laws  of  value,  though  one  must  always  keep 
in  view  the  relation  of  this  circumscribed  area  to  its  environ- 
ment. How  local  nn^r/--  ni.ny.  in  a  scientific  way,  be  delimited 
and  isolated  for  purposes  of  study  will  appear  in  a  later  chapter. 


if. 


t ' 


a 


f^ 


96 


ESSENTIALS   OF   ECONOMIC   THEORY 


diminish  the  quantity,  we  raisn  thp  prict;.  That  is 
the  coininercial  fact  and  it  furnishes  a  beginning  for 
a  theory  of  value. 

Let  us  suppose  that  we  have  a  fixed  quantity  of 
goods  on  hand,  that  all  must  be  sold,  and  that  no  one 
knows  at  the  outset  what  price  they  will  bring. 
There  might  conceivably  go  on  an  inverted  kind  of 
auctioning  process,  in  which  the  sellers  at  the  outset 
would  ask  a  high  rate,  sell  a  few  of  their  goods,  and 
then  grailually  reduce  the  price  till  the  last  article 
should  be  sold.  At  each  reiluction  of  the  price  the 
"effectual  demand,"  so-called,  would  increase.  This 
means  that  the  people  who  want  the  article  are  actu- 
ally willing  to  take  and  pay  for  larger  quantities 
the  lower  the  price  falls.  M^re  desire  does  not  influ- 
ence  the  mai'ket,  but  an  "efiFectual  demand"  means  a 
desire  and  a  tender  of  the  money  that  is  asked  Tor 
tho^"gooila!  rt  is7  in  short,  an  actual  purchase  and 
the  amount  of  it  Ix'comes  larger  as  the  price  goes 
down.  People  who  did  not  buy  the  article  before 
now  add  it  to  the  list  of  goods  that  they  take  for  use, 
and  the  people  who  were  already  taking  a  certain 
quaiiUty  of  it  now  take  more. 

Equation  of  Supply  and  Effective  Demand.  —  If  this 
effective  demand,  or  amount  of  goods  actually  bought 
and  paid  for,  becomes  steadily  larger  the  lower  the 
price  becomes,  it  is  clear  that,  however  large  the  total 
supply  may  be,  it  can  all  be  sold  by  making  the  price 
low  enough.  It  was  once  thought  that  this  is  all 
we  need  to  know  of  prices  current  or  market  values. 
At_somc  selling  rate  or  other  the  quantity  actually 
offered  will  come  to  equal  the  quantity  that  is  actu- 
.alTy  bought.  This  is  the  equation  of  demand  and 
supply.    The  (Uiantity  offered  is  here  supposed  to  be 


VALUE    AND    ITS    RELATION    TO    INCOMES 


97 


fixed  and  to  include  all  of  the  article  that  is  in  dealers' 
hands  and  that  has  to  tx;  sold;  aiul  the  price,  starting 
at  a  high  rate,  is  supposed  to  go  down  till  the  saIeof~ 
th«  entire  quantityJa-^ffiict^  '      "^ 

Varying  Demand  and  Price.  —  The  facts  that  have 
just  been  stated  account  only  in  a  partial  way  for 
the  adjustment  of  market  price.  One  who  wishes 
to  trace  phenomena  to  their  causes  cannot  help  asking 
why  demand  and  supply  insure  the  selling  of  a  given 
amount  of  goods  at  one  rate  rather  than  at  another. 
If  apples  are  offering  at  two  dollars  a  barrel,  why  is 
it  that,  in  a  particular  local  market,  one  thousand 
barrels  and  no  more  can,  at  that  rate,  be  sold?  We 
can  readily  se(>  that  at  one  dollar  a  barrel  more  could 
be  sold  than. at  two,  and  that  at  three  less  would 
be  sold.  But  why  is  it  that,  at  two  dollars,  the 
definite  number  of  one  thousand  barrels  is  the 
amount  that  is  taken  and  paid  for?  Why  is  the 
equation  of  demand  and  supply  established  at  exactly 
that  price? 

Demand  and  Final  Utility^— We  come  nearer  to  the 
cause  that  acts  in  adjusting  the  price  of  apples  when 
we  say  that  thev  sell  at  two  Hollars  a  barrel  because 
that  simi  pvpmgsns_their  "final  utility."  This  means 
tliat,  if  such  an  auctioning  process  as  we  have  described 
were  resorted  to,  the  last  barrel  of  apples  which  would 
be  sold  would  have  to  the  buyer  an  amount  of  utility 
just  equal  to  that  of  the  final  unit  of  any  other  article 
that  could  have  been  had  for  the  same  money.  The 
auctioning,  however,  would  cause  different  barrels 
of  apples  to  sell  at  different  prices,  whereas  there  is 
something  in  the  working  of  competition  which  causes 
all  of  them  to  sell  at  the  same  price.  It  is  necessary 
to  see,  first,  how  the  price  of  the  "final"  one  is  ad- 


t  i  ; 


H 


i  ;^ 


^i^^Vi:^.>  ^  *.2Mkv, 


: 


i 


His- 


?:  I 


98 


ESSENTIALS   OF  ECONOMIC  THEORY 


justed  and,  secondly,  how  that  fixes  the  price  of  all 
the  others. 

The  Law  of  Diminishing  Utility.  —  We  revert  here 
to  one  of  those  general  laws  of  economics  that  we 
have  already  stated  and  see  it  acting  under  the  condi- 
tions of  distinctly  social  life.  Goods  of  a  given  kind 
have  less  and  less  utility,  per  unit,  the  more  the  user 
has  of  them.  If  you  offer  him  apples  in  increased 
(juantity,  he  will  value  the  first  part  of  the  supply 
highly,  but  will  attach  less  value  to  the  later  parts. 
When  the  desire  for  this  fruit  is  fairly  well  satisfied, 
ho  will  fin<l  nt^er  articlcs  of  morc  hm^ortapce.  At 
the  price  of  two  dollars  a  barrel  it  is  just  worth  his 
while  to  buy  a  final  barrel  of  them.  That  quantity, 
as  added  to  his  winter's  supply,  will  give  him  two 
dollars'  worth  of  benefit.  This  means  that  it  will  do 
him  as  much  good  as  anything  else  which  he  can  get 
for  the  same  amount  of  money. 

The  Equalization  of  Final  Utilities.  —  Two  dollars 
spent  in  addnig  to  his  previous  stock  of  other  things 
will  do  the  man  in  the  illustration  the  same  amount 
of  good  that  he  can  get  from  a  final  barrel  of  apples, 
ami  no  more.  In  the  case  of  goods  which  are  all 
alike  and  of  which  consumers  are  alwavg  gl«d  t.r>  nsp 
an  additional  amount,  prices  jond  to  adjust  themselves 
in  such  a  way  that  a  final  unit  of  anv  one  which  the 
consumer  buys  with  a  dollar  is  worth  just  as  much 
;  to  him  as  a  final  unit  of  any  other  article  he  buys 
with  that  amount.  The  last  dollar  paid  for  apples 
is  as  remunerative,  in  the  way  of  pleasure  and  benefit 
secured,  as  is  the  last  dollar  used  to  im^  -ove  his  ward- 
robe, to  add  something  to  his  stock  of  furniture,  to 
buy  tickets  to  the  theater,  etc.  Apples  have,  as  it 
were,  to  compete  with  clothing,  furniture,  and  amuse- 


VALUE    AND   ITS    RELATION   TO    INCOMES 


99 


ments  for  the  consumer's  favor,  a.  J  if  the  \v;uler 
ehur-^es  more  for  them  than  do  the  venders  of  other 
things  having  the  same  power  to  give  pl.'asure,  some 
of  the  apples  will  remain  unsold;  for  though  eustoin- 
ers  will  always  give  as  much  as  they  would  have  to  pay 
for  other  things  of  eijual  final  utility,  they  will  not 
give  more. 

T he J^rices_ol_All  Increments  of  Supplu  Equal.  — 
A  consumer  n!vvny«  frr.f^  a  net_gur])lus  of  Ix'neiit 
fioni  till'  (■ftrlyjncrernciits.orthe  goods  he  consumes. 
If  the  last  barrel  of  apples  is  worth  two  dollars,  — 
or,  what  is  the  same  thing,  if  the  last  barrel  has  in  it 
an  amount  of  utility  eiiual  to  the  final  utility  of  other 
things  tliat  two  dollars  will  buy,  —  the  first  barrel 
has  a  larger  utility ;  and  yet  ••   ,.  ,sts  no  more  than  the 
last  one.    The  sellers  of  appk     if  they  expect  to  dis- 
pose of  all  that  they  have,  must  at  ihc  outset  fix  the 
price  at  such  a  point  that  the  very  last  increment  of 
the  supply  will  successfully  compete  with  other  ar- 
ticles for  the  favor  of  i)urchasers.     Competition  forces 
them  to  gcli  the  whole  amount  so  cheaply  th.at  tho 
least  important  part  of  it  may_he_fls  important  to  the 
I -urchaser  of  that  part,  rs  fhn  PMrr.;;:;pT,wi.,.g  nnrl  Irj-t 
important  nart  of  the  supply  n(  ,^t}ier  ^'"'"g;     Noth- 
ing but  a  monopoly  of  the  entire  available  stock 
would  enable  them  to  carry  out  the  auctioning  plan 
and  offer  the  stock  piecemeal,  so  as  to  get  a  higher 
price  for  the  parts  offered  early.     Even  then  buyex^ 
who  should  perceive  the  fac  that  a  large  part  of  the 
stock  remained  in  reserve  and  i  lat  it  must  ultimately 
be  sold   would  be  able,  by  delaying  their  purchases, 
to  get  the  benefit  of  a  later  and  lower  rate,  so  that 
the  monopoly  itself  would  be  only  partially  success- 
ful in  its  policy.      In  the  absence   of  a  monopoly 


'-%i 


■  I 


f  1' 
i  ' 

S 


5 


,  i. 


100 


E8S^:NT1AL8    OF    ECONOMIC   THEORY 


1  Si 


venders  are  coinpeiled  to  sell  all  articles  of  one 
kind  and  (]uality  at  one  price.  The  man  who  should 
fix  a  higher  price  on  his  portion  of  the  supply  would 
be  passed  by  in  favor  of  other  sellers  who  were 
disposing  of  their  final  increments,  and  his  business 
would  (juietly  drift  away  from  him.  There  cannot  be 
two  prices  for  one  commodity  jy  '^"'  -""^'^  market  at 
the  sume  time.     Ti^^pt  i«  fnn.liimpnt,^!      Even  the 


monopoly  is  able  to  g(;t  ilifferent  prices  for  differ- 
ent parts  of  its  output  only  by  offering  them  at  differ- 
ent times ;  and  competing  protlucers  cannot  do  this. 
They  are  forced  to  keep  the  price  of  all  they  offer  at  a 
level  that  expresses  its  final  utility. 

The  Law  of  Value  affected  hif  the  Difficulty  of  using 
Two  Similar  Goods  at  Once.— There  are  two  nnper- 
fections  in  the  common  statement  of  this  law  of  final 
utility  which  need  to  be  removed  in  order  that  the 
theory  of  value,  which  is  based  on  the  law,  may  be 
true  and  useful.  The  first  lies  in  the  assumption  that 
people  buy  completed  articles,  such  as  coats,  tables, 
vehicles,  watches,  etc.,  in  regular  series  of  units,  add- 
ing to  their  stock  coat  after  coat,  wateh  after  watch, 
etc.,  all  just  alike,  ill  the  utility  of  the  last  one  l)ecomes 
so  small  that  it  is  better  to  buy  other  things.  On  this 
supposition  the  price  of  the  whole  supply  of  any  such 
thing  corresponds  with  the  utility  of  the  last  one  in  the 
consumer's  series.  This  fairly  well  ilescribes  the  case 
of  commodities  like  apples,  of  which  men  consume 
now  more  and  now  less  per  day  or  per  week  and  are 
always  glad  to  increase  the  amount  they  use.  Of  most 
kinds  of  consumers'  goods  a  person  wants  at  one  time 
one  unit  anil  no  more,  and  a  second  unit,  if  he  has  to 
use  it  himself  within  the  same  time  in  which  he  uses 
the  first,  would  be  an  incumbrance.     Its  utility  would 


.^m^^^^^^MT^^M. 


M 


'^W 


VALUE    AND    ITS   RELATION   TO    INCOMES         101 

be  a  negative  quantity.  Two  quite  similar  coats 
would  never  be  bought  by  the  same  person  if  he  had 
only  his  own  needs  in  view  and  must  use  both  coats 
through  the  same  period.  The  first  unit  of  his  supply 
is,  for  this  period,  also  the  last. 

The  Lair  of  Value  affected  bif  the  Fact  that  the  Final 
Unit  of  a  Good  is  usually  a  Complex  oJJJnlike  Utilities. 
—  The  second  miperiection  consists  in  the  assump- 
tion that  in  measuring  the  utility  of  such  a  unit  the 
consumer  estimates  the  importance  to  himself  of  the 
article  taken  in  its  entirety.     In  the  case  of  the  apples 
of  our  illustration  the  difficulty  is  not  obvious.    A 
man,  as  we  have  just  noticed,  may  increase  or  dimin- 
ish his  consumi)tion  of  this  fruit;  the  first  few  apples 
that  he  uses  will  give  him  more  pleasure  than  a  second 
similar  quantity,  and  the  price  of  apples  in  the  market 
may  actually  depend  on  the  utility  of  the  final  p(>ck 
of  apples  that  each  of  the  customers  consumes  in  a 
season.     In  other  words,  there  is,  in  this  instance,  a 
probability    that    the    goods,    although  supplied    at 
once,  may  be  appraised  as  if  they  were  offered  in  a 
regular  series  and  that  the  law  of  final  utility,  in  its 
common  and  simple  form  of  statement,  may  in  this 
|)articular  apply  to  the  case.     The  second  difficulty, 
however,  remains,  and  even  in  the  case  of  such  goods 
as  apples  renders  the  conmion  statement  somewhat 
inaccurate,  while  in  the  case  of  most  kinds  of  consum- 
ers' goods  the  inaccuracy  is  glaring.     If  the  price  of 
fine  watches  corresponded  with  the  utility  of  the  last 
one  that  a  consunuT  uses,  it  would  be  many  times 
greater  than  it  is.     Rather  than  go  without  watches 
altogether   nuaiy   a   man   would   pay   one  thousand 
dollars  for  one  for  which  he  actually  gives  a  hundred; 
and,  moreover,  this  watch  may  be  the  "final"  one 


'f  ' 


f 


t: 


(J 

I:  I 


hH 


~ii 


.^s^^ai^^ij 


.'-^     't 


102 


ESSENTIALS   OF    ECONOMIC  THEORY 


i 


n   ■ 

1 


ill' 
I 


in  his  case.  The  utility  of  the  last  overcoat  that  a 
man  uses  in  the  winter  may  be  such  that,  if  he  could 
have  it  on  no  other  condition,  he  would  readily  give 
five  hundred  dollars  for  it  instead  of  fifty. 

How  Unlike  Services  may  be  rendered  by  One  Good 
at  the  Same  Time.  —  What  people  want  of  any  useful 
thing  is  an  effect  in  themselves,  —  a  pleasure  or  a 
benefit  which  they  expect  to  get,  -and  apart  from 
this  subjective  result  they  would  not  want  the  thing 
at  all.    The  power  to  confer  a  particular  benefit  is  a 
utility.     Men   buy  goods   solely   for  their   utilities, 
and  they  measure  these  service-rendering  powers  in 
the  tilings  offered  to  then   and  pay  for  them  accord- 
ingly.    Now,  it  happens  that_artip1ps  nffon  mmhine 
in   thpmsp]yps~ft   cnnsiderahle   number   of   different 
utjlitLes,   or  seryi_cezre"'^p''''"g  -powers,   and  that   in 
buying  an  article  the  rnan  pays  fnr  then]  ^*1       It  is 
as  though  four  or  five  different  servants,  each  having 
his  own  specialty,  were  to  offer  themselves  for  hire 
and  invite  an  employer  to  consider  what  each  one 
could  do  for  him.     In  buying  an  article  which  will 
serve  hir\  in  several  ways,  a  man  appraises  all  the 
unlike  services  that  the  article  will  render.     He  se- 
cures several  services  at  oiioe,  as  he  would  do  if  he 
hired,  in  a  body,  several  actual  servants.    The  same 
thing  would  happen  if,  instead  of  hiring  human  ser- 
vants with  different  aptitudes,  one  should  buy  different 
commodities  each  of  whicii  is,  in  reality,  an  inanimate 
servant,  able,  in  its  own  way,  to  do  something  useful  or 
agreeable  for  the  purchaser.     We  could  bunch  a  lot 
of  these  goods  and  buy  them  collectively.     Verniers 
of  the  goods  could  tie  them  tog(^ther  in  bundles  and 
offer  them  thus  for  sale.     If  the  difforont  goods  were 
also  sold  separately  in  the  market,  they  would  com- 


VALUE    AND    ITS    RELATION    TO    INCOMES 


mand  in  the  bundles  the  same  prices  that  they  would 
command  when  sold  each  by  itself,  and  a  bundle  would 
bring  the  sum  of  the  several  prices  of  its  component 
articles.  In  just  this  waji_in_which  an  aggregate  of 
di&erent  nnods  would  get  its  vabmfum  does  anji  one 
article  which  is  made  up  oj  dijerent  utilities  get  its 

rating, The   utilities   are   aji;^raised   separately.     In 

buying  an  article  which  is  a  composite  of  (TIlTeront 
utilities,  we  virtually  employ  a  company  of  servants 
who  have  different  specialties  and  insist  on  being 
hired  all  tc^i^ethcr  or  not  at  all. 

How  the  Normal  Price^olajhmdle  of  Unlike  Goods 
would  be  F  cd.  —  \Vc  have  now  to  see  how  the  acTIon 
of  the  market  analyzes  an  article  and  puts  a  price  on 
the  several  utilities  which  compose  it.  The  market 
does  this  in  exactly  the  same  way  in  which  it  woultf 
appraise  a  bundle  of  jlissimjlar  articles  which  hadJcT 
be  sold  separately,  and  we  will  therefore  trace  the 
operation  by  which  a  package  containing  the  com- 
modities A,  B,  C,  and  D  would  get  its  value  in  an 
actual  market. 

How  the  Normal  Price  of  a  Single  Good  inaJBundle 
of  Unlike  Goods  would  be  Fixed.  —  Let  us  see  how  a 
buh(ITe'ma<le  up  oT  commo7TTtres  A,  B,  C,  and  D  would 
get  its  value  in  the  market.  We  will  supp^.-^  t''at 
these  articles  are  here  named  in  the  order  ot  their 
importance,  and  that  A  has  the  highest  utility,  since 
it  renders  the  most  important  service,  and  that  D  has 
the  least.  It  may  be  that  the  article  A  has  a  utility 
rated  at  one  hundred  dollars  in  a  particular  man's 
esteem.  He  would  give  one  hundred  dollars  for  it 
rather  than  do  without  it  rdtog(>ther.  The  service, 
then,  that  one  artiflo  of  this  kuv\  can  render  is  ex- 
pressed by  the  sum  one  hundred  dollars.    Article  B 


i     ■ ' 


:  ■  r 

It 


t  J. 


;  r 


i^i  i 


i    i 


JTf« 


^-»M 


~^'r^mmm^m'^%'i^^i^-^^ii^^sm 


104 


ESSENTIALS  OF  ECONOMIC  THKORY 


U 


i  ^ 


!  *  S 


I  J  i 


.11! 


taken  separately  may  be  worth  fifty  dollars,  since  it 

may  render  such  services  that  the  man  would  give 

fifty  dollars  rather  than  be  without  it.     A  third  article, 

C,  may  in  the  same  way  bo  valued  at  twenty  dollars 

and  a  fourth  at  ten.    Now,  if  a  man  has  to  buy  the 

whole  bundle,  must  he  pay  one  hundred  dollars  plus 

fifty  plus  twenty  plus  ten,  or  one  hundred  and  eighty 

for  the  whole  ?    This  does  not  by  any  means  follow. 

The  first  article  may  be  sold  separately  at  a  price 

far  below  one  hundred  dollars.    There  may  be  so 

large  a  supply  of  it  that,  in  order  to  find  a  market 

for  it  all,  the  makers  must  take  ten  dollars  for  it. 

This  fixes  the  market  price  of  that  amount  of  this 

commodity  at  ten  dollars.     If  we  now  glance  beyond 

the  question  of  the  "market  price"  of  the  goods  and 

consider  their  more  permanent  or  "normal  price," 

the  inquiry  requires  us  to  do  more  than  ascertain 

why  a  definite  quantity  of  the  goods  offered  at  a 

certain  time  sells  for  a  certain  amount.    An  appeal 

to  the  law  of  final  utility  answers  that  question. 

To  know,  however,  why  the  permanent  price  is  what 

it  is,  we  have  to  know  what  fixes  the  permanent 

supply,  and  we  discover  that  the  cost  of  making  the 

goods  is  here  a  dominant  influence.     For  the  present 

we  assume  that  this  cost  does  not  change,  since  such 

changes  are  a  subject  for  the  dynamic  studies  which 

will  come  later.    The  present  fact  is  that  production 

has  been  carried  to  such  a  point  that  no  more  of  these 

goods  can  be  sold  at  the  cost  price,  and  there  the 

enlargement  of  the  output  has  stopped;   the  supply 

has  at  some  time  in  the  past  reached  this  normal 

point  and  now  remans  there.    Ten  dollars  represents 

the  ^nal  utility  of  the  article,  and  this  surr,  is  what  it 

costs  to  make  it.    If  it  could  be  sold  for  any  more  than 


■ir'|gS#- 


VALUE    AND   ITS   RELATION   TO    INCOMES 


10.5 


thnt,    pnmppt.it.mn   wnnj^j   f^rjppr  npw  producers  into 
this  business  and  would  impel  those  already  in  it  to 
enlarge  their  production  till  the  price  would  stand 
at  the  normal  or  cost  level  of  ten  dollars. 
.     The   Consumers'   Surplus.  —  In   every   such    case 
/there  are  men  who  would  give  much  more  for  the 
article  rather  than  be  without  it,  and  we  have  sup- 
posed that  some  one  would  pay  a  hundred  dollars  for 
this  commodity  if  he  could  not  otherwise  obtain  it. 
'  Ninety  dollars,  then,  measpr^a  «-hpt  ^y^.  ^^^y  p^j|  jjjg 
consumers'  surplus,  or  the  pjpar  hnnnfif  ^^  ^pj^^  f j-j^^ 
buyJQg^jtJtsjnarket  price  an  articlejhat  is  worth 
to  hinLSomuchjnore.    This  comes  about  by  the  fact 
that  the  makers  of  article  A,  in  order  to  sell  the  amoimt 
of  goods  that  competition  has  impelled  them  to  make, 
must  accept  the  offers  of  persons  who  can  consistently 
give  only  ten  dollars  for  it.     These  are  relatively  poor 
persons,  and  as  the  sum  of  ten  dollars  expended  on 
other  articles  would  benefit  them  as  much  as  ten 
dollars  spent  on  this  one,  it  is  a  "final"  purchase,  or 
a  final  increment  of  their  consumers'  wealth.     In 
order  to  get  it  they  sacrifice,  in  some  other  formT^ 
benefit  as  great  as  J;he  one  they  get  from  acquiring 
this  commodity  and_receiye^  therefore,  no  consumers' 
surplus  from  |t.    These  are  the  men  whose  demand 
helps  to  fix  the  price  of  the  article  A,  and  the  willing- 
ness of  other  persons  to  give  more  does  not  make  it 
bring  any  more.    The  rich  men,  who  stand  ready  to 
pay  a  Imndred  dollars,  if  necessary,  arc  gainers  by 
Ictti'.g  poorer  men  fix  this  price.     It  is  by  catching 
the  patronage  of  these  poorer  men  that  the  makers 
can  dispose  of  their  large  output,  and  in  doing  this 
they  have  to  bring  the  price  down  to  ten  doiiars. 
TU  Funr.tinp.  nf  a  Rpprini  rir^^^  f^f  Mnrgrnal  Pur 


M 


1  ?  *  i--' 

If  ■ 


if 

5 

hi 


i     i 


i        . 


Wmr^-''^  'Wd^J^ 


106 


ESSENTIALS    OF   ECONOMIC   THEORY 


chasers  of  Each  Article.  —  In  like  manner  there  js  a 
classic J^ marginal  purchasers"  of  thc^rtJck—B,  or 
the  persons  whopay  for  it  so  much  that  thexget  no  net 
benefit  ^T  consumers'  surplus  from  the  purchase.  _  If 
they  did  not  buy  this  article,  they  could  get  something 
else  thaT  would  do  them  as  much  good  for  the  -^ame 
outlay.  It  costs,  let  us  say,  only  ten  dollars  in  the 
making,  nnd  enough  of  these  articles  are  made  and 
offered  for  sale  at  that  price  to  supply  all  customers 
who  are  attracted  by  the  offer.  The  men  who  would 
pay  more  for  it  do  not  count.  Each  of  the  other 
articles  in  the  bundle,  when  it  is  offered  separately 
and  at  the  cost  price  which  competition  establishes, 
represents  a  final  utility  to  some  one  class  of  pur- 
chasers. Coiiipetition  hn°  rT,r,f\t^  thp  wViqIp  sj^ppjiy 
so  large  that,  in  order  to  dispose  of  jt^_yTO(icra-must 
attract  the  particular  class  who  will  takc_it„  at  the 
ten-dollar  rate.  This  class  is  in  the  strategic  |)osition 
of  market-price  makers  for  this  one  thing.  They  are 
ithe  last  class  to  whom  the  producers  can  afford  to 
^at£r.  If  each  of  the  five  articles  in  the  bundle  costs 
the  makers  ten  dollars,  and  if  so  many  of  each  are 
made  that  they  just  supply  the  needs  of  the  classes 
that  will  buy  them  at  ten  dollars  apiece,  the  price  of 
all  five,  when  sold  separately,  will  be  fifty  dollars. 

\Tngf_nf    tl^P    pnrphgsprs    nf    Ppoh    article    WOUld    givC 

more  than  ten  for  it  if  thev  had  to.  but  some  would 
not"do  so,  and  the  producers  cater  to  the  needs  of 
these  ma  rpTnn1_  persona. 

f^^^'\  JJir—l^T-ic""  of  fhf  dnnd"  nrf  fireftj!^^  P^^V 
are  sold  in  Vario-us^Cmibinations.  —  How  do  ther^e 
articles  get  their  valuation  when  they  are  tied  in 
bundles  containing  all  five  of  them  and  th"  bundles 
are  sold  unbroken?    In  essentially  the  same  way  as 


.  -»▼ 


» 


i 


VALUE   AND   ITS   RELATION   TO    INCOMES  107 

whEa^liLsemrately.  Article  A,  we  will  suppose, 
IS  one  of  the  necessaries  of  life  and  is  to  be  had  by 
Itself  in  the  market.  Article  B  represents  a  comfort, 
and  C  and  D  are  luxuries.  The  bundles  are  so  made 
that  A  and  B  are  often  sold  together;  as  are  also 
A,  B,  and  C;  and  A,  B,  C,  and  D.  A  purchaser  may 
have  at  his  option  the  first  only,  the  first  and  the 
second  combined,  the  first  three,  or  all  four.    Article 

A,  when  it  stands  alone,  can  be  had  at  the  natural  or 
cost  price  and  in  quantity  sufficient  to  supply  the 
wants  of  all  classes  of  buyers  from  the  highest  down 
to  the  class  which  will  take  it  at  ten  dollars  —  the 
cost  of  making  it  —  but  at  no  higher  price.  Any  one 
can  have  the  A  either  alone  or  tied  to  other  articles 
at  this  price.  One  who  buys  A  and  B  in  combination 
will  pay  for  article  A  only  the  same  price  that  it 
commands  when  sold  separately;   and  oince  he  buys 

B,  the  u  ility  of  which  is  less  than  that  of  A,  at  ten 
dollars,  it  is  clear  that  he  gets  A  for  less  than  it  is 
worth  to  him,  but  the  ten  dollars  may  be  all  he  would 
give  for  the  B.     This  man  is  not  the  marginal  pyy-. 
chaser  of  A,  for  in  buying  it  he  realizes  a  consumers' 
surplus;  but  for  the  article  B,  which  is  tied  to  it,  he 
may  pay  all  that  it  is  worth  to  him.     For  that  he  is 
a  marginal  purchaser,  and  as  such  he  gets  no  con- 
sumers' surplus  out  of  it.     What  he  pavs  for  B  will 
just  suffice  to  buy  something  else  which  is  equally 
important  to  him.     Th^.Eiic£  of  this  bundle  qU^-q 
aiticlct:  is  nltimntelv  dPtnrnn-no,|  ^y  the  rn-t  nf  the 
two_com]2onents,  wliich  is  twenty  dollars,  and  enough 
of_each  component  is  mnde  nndofferod  in  the  majkot 
to  supplvjhejvaiits^o^^  ^^ 
barely  dvmh  to  take  it  at  the,_cosy;ate.     The  class 
that  hesitates  at  taking  A  will  not  consider  B,  but 


i, 


!    I 


I   i 
I   I 


)^^jM^^^^^J^^ 


108 


ESSENTIALS  OF   ECONOMIC  THEORY 


\ 


I 


iir 


i''' 
1 


the  class  that  hesitates  at  taking  B  gets  a  clear  bene- 
fit from  buying  A  at  the  price  that  expresses  the 
utility  of  A  to  a  poorer  class  of  persons. 

How  Different  Classes  of  Purclmsers  cooperate  in 
this  Price  Making.  —  The  rule  of  one  price  for  one 
\article  of  course  holds,  and  the  man  who  would  have 
a  clear  and  decisive  motive  for  buying  the  A  for 
more  than  ten  dollars,  if  he  had  to  do  so,  gets  the 
benefit  of  two  facts:  first,  that  it  costs  only  that 
I  amount  in  the  producing,  and  secondly,  that  com- 
/  petition  makes  the  supply  of  it  so  large  that  it  is 
I  brought  within  the  reach  of  those  persons  who 
*  value  it  at  only  ten  dollars.     It  takes  two__differeat 

classes  of  ri"!!^^l^''ll2-^''  ^'^^  P*"^      "'^  ^^^''^  pnekafre 
oTtvi-o  articles,  and  their  OLtiflgs  Jx  it  at  twenty 
doliafs.     Exactly  the  same  influences  regulate  the 
/  price  of   the  bundle  which   includes  A,   B,  and  C. 
/  Men  who  buy  C  can  afford  to  have  a  luxury,  and 
/  therefore,  if  they  had  had  to  do  so,  would  have  given 
'    more  than  they  do  give  for  the  articles  of  necessity 
and  comfort.     If  the  price  of  A  and  B  were  higher 
than  it  is,  they  would  still  buy  these  two  things, 
but  they  would  not  rai.se  their  bids  for  C,  since  for 
this  they  are  marginal  purchasers.     This  commodity 
is  therefore  sold  at  the  price  that  will  just  induce 
this  class  of  persons  to  add  it  to  their  list  of  con- 
sumers' goods.     There  is  a  further  class  in  whose 
list  of  purchases  D  is  marginal,  while  A,  B,  and  C 
yield  a  consumers'  surplus  in  the  form  of  an  un- 
compensated personal  benefit. 

Different^  Utilities  in  an  Article  appraised  ashore 
Different  Goods  in  a  Package.  —  It  is  an  actual  fact 
that  inosi  commmlitii  s  are  like  these  packages  of 
unlike  articles-    Thev  are  I)uutlles  of  unlike  utilities, 


'.'xi^^imm's 


VALUE   AND    ITS   RELATION   TO    INCOMES  109 

and  the  market  actually  finds  a  way  to  analyze 
cohiposite  Things  and  put  a_separat(!  pri(;e~dreach 
utility.  TTmay  seem  very  theoretical  to  say  Hiat 
a  concrete  thing,  like  a  watch,  a  coat,  a  dining  table, 
or  a  roast  fowl,  is  made  up  of  such  abstract  things 
as  utilities  and  that  each  of  these  has  its  separate 
price;  yet  such  is  actually  the  fact,  and  if_go(«ls 
were  not  valued  in  the  market  in  this  way,  the 
prices  of  alTarticles  of  coin{7)rt  ajidjiuxurv  would 
be  very  nmch  hi^-hfi-  tliiin   thoy  are.   "  ' 

A  man  pays  seventy-five  dollai-s  for  an  overcoat, 
but  if  he  could  not  get  the  service  that  the  coat  rs 
a  whole  renders  without  paying  five  hundr(>d  dollars 
for  it,  he  would  pay  it :  for  otherwise  he  could  hardly 
get  through  a  winter.  No  man  who  buys  an  over- 
coat worth  seventy-fiv(>  dollars  would  refuse  to  pay 
more  if  that  were  the  necessary  condition  of  having 
an  overcoat  at  all.  The  garment  as  a  whole  is  far 
from  being  a  "marginal  utility"  to  any  one;  and 
yet  there  is  something  in  it  that  is  so.  This  element 
is  like  the  article  D  in  the  fourth  bundle  referred 
to  in  our  illustration.  There  is  a  particular  utility 
in  the  composite  good  for  which  the  man  pays  all 
that  it  is  worth  to  him;  and  he  would  go  without 
that  utility  if  the  seller  charged  more  than  he  does. 
The  most  important  service  that  the  coat  rentiers 
is  that  of  keeping  the  'nan  warm ;  but  a  very  cheap 
garment  would  render  that  service,  and  six  dollars 
will  buy  such  a  garment.  The  man  does  not  need 
to  pay  more  than  six  dollars  for  that  one  service. 
The  supply  of  cheap  coats  is  such  that  the  final 
one  must  be  offered  for  six  dollars  in  order  to  induce 
certain  poor  purchasers  to  buy  it,  antl  that,  more- 
over, is  all  that  it  costs  to  make  it.     No  one,  there- 


-^i 


!  '■  f. 


\l 


■iSB^I^BkMMMM^^.  v^^y^cij  M 


1. 


I  I II 


110 


ESSENTIALS   OF    ECONOMIC   THEoKV 


fore,  is  obliged  to  pay  more  than  six  dollars  for 
something  that  will  keep  him  warm,  however  much 
such  a  service  may  be  worth  to  him.  Coats  of 
another  grade  have  a  second  utility  combined  with 
this  one,  since  they  are  made  of  better  cloth  and 
are  more  comely  in  appearance.  Utilities  of  an 
aesthetic  kind  arc  combined  with  the  crude  qualities 
represented  by  the  cheapest  coats.  The  supply 
of  coats  of  this  grade  is  such  that  they  must  be  of- 
fered for  twenty  dollars  in  order  to  induce  some 
one  to  take  the  final  or  marginal  one.  What  does 
this  mean?  It  means  that  this  purchaser  will  pay 
fourteen  dollars  and  no  more  in  order  to  have  the 
second  utility,  consisting  in  comeliness,  added  to 
the  first  utility,  capacity  to  keep  him  warm.  This 
man  would  give  more  than  twenty  dollars  rather 
than  go  uncloaked;  for  it  i?  plain  that,  if  he  will 
pay  fourteen  dollars  for  comeliness,  he  will  give 
more  than  six  for  warmth.  Probably  he  would 
pay  one  hundred  dollars  for  the  article  if  he  had  to, 
and  in  getting  it  f(jr  twenty  he  gets  a  large  con- 
sumers' surplus.  Tliis  is  because  he  secures  the 
first  utility  (1)  for  less  tlian  it  is  worth  to  him,  (2) 
for  just  what  it  costs  in  the  making,  and  (3)  for  just 
what  it  is  worth  to  the  poorer  purchasers.  He  is 
willing  to  pay  only  fourteen  dollars  for  the  comeli- 
ness, which  is  the  second  utility  that  the  garment 
contains,  and  he  is  therefore  a  marginal  purchaser 
of  this  second  utility.  It  costs  only  the  sum  of 
fourteen  dollars  to  add  the  second  utility  to  the 
first,  and  enough  coats  of  the  second  grade  are  made 
to  catch  the  patronage  of  the  class  of  buyers  who 
will  give  so  much  and  no  more  for  it.  They  are 
the  persons  whose  demand  figures  in  adjusting  the 


'^m^^"^'' 


VALUE    A\U    ITS    KKLATION    TO    IXCOMKS  111 

market  price  of  this  second  utility.  Competing 
producers  of  coats  cause  the  supply  of  those  of  the 
second  grade  to  be  so  large  that  they  could  not  all 
be  sold  unless  the  second  utility  were  offered  for 
fourteen  dollars.  This  makes  the  price  of  the  entire 
coat  twenty  dollars  as  the  result  of  catering  in  a 
detailed  way  to  the  demand  of  two  different  classes 
of  buyers. 

In  exactly  the  same  way  the  price  of  the  third 
grade  is  fixed  at  forty  dollars  and  that  of  the  still 
higher  grade  at  seventy-five.      In  the  third  grade 
there  is  a  utility  which  it  costs  twenty  dollars  to 
add  to  those  possessed  by  garments  of  the  second 
grade,  and  this  is  added  to  enough  of  them  to  supply 
all  persons  who  will  pay  twenty  dollars  or  more 
for  it.    These  coats  are  made  of  more  highly  finished 
goods  and  have  better  linings,  and  this  gives  them 
the  third  utility  which  the  market  appraises  at  its 
cost,  which  is  twenty  dollars.     The  men  who  buy 
the  forty  dollar  coats   get  a  surplus  of    benefit  in 
s.    uring  the  first  two  of  the  utilities  that  are  em- 
bodied in  them,    since  for  these  they  pay  less  than 
they  would  pay  if  they  had  to;    but  they  get  no 
surplus  over  the  cost  of  the  third  utility.     It  is  to 
secure  their  custom  that  the  vender  must  sell   it 
for  twenty  dollars.     In  a  like  manner  a  coat  of  the 
next  grade,  which  is  a  more  fashionable  garment, 
sells  for  seventy-five  dollars  I  ecause  it  has  a  fourth 
utility  which  costs  another  sum  of  thirty-five  dollars 
and,  to  the  marginal  buyers,  is  worth  that  amount. 
These  men  get  a  surplus  from  buying  the  first  three 
utilities  at  what  they  cost  their  producers  .<ind  what 
they  are  worth  to  poorer  purchasers.     It  appears, 
then,  that  a  seventy-five  dollar  coat  is  a  bundle 


.'  Il 


I ! ; 


hi 


;  f 


\-- ' 


1 1 

it 


i  > 


i  I 


1 1 


a.  -»?%;*■ 


r  :^v,r. 


zm. 


112 


KS8KNTIALS    OF    ECONOMIC   THKORY 


of  (Ustinct  i'l('in(>ntfl,  or  utilities,  each  of  which  has 
its  scpariitc  cost  and  is  sold  at  that  cost  price  to 
a    particular    marginal    class    of    purchasers.     Each 
element  is  valued  exactly  as  if  it  were  in  itself  a  com- 
plete articles   tied   in   this   case   to  others,   but   also 
offered   separately   in   the   market.     Persons  of  one 
class  are  final  purcha.sers  of  the  first  utility  when 
it  is  offered  at  its  cost,  six  dollars.     Another  class, 
in  a  like  maimer,  helps  to  set  the  price  of  the  s«'      .d 
utility  at  fourteen,  and  still  other  classes  figure  in 
the  adju.stment  of  the  prices  of  the  third  and  fourth 
utilities.     These  cost  the  manufacturers  twenty  dol- 
lars  anil   thirty-five   dollars   respectively,  and  com- 
petition insures  the  making  of  enough  of   them  to 
catch  the  patronage  of  those  who  will  pay  just  these 
amounts.     Memt)eni_jQL  nnp   rlaww   act    w   marginal 
piirrliAserg^in  price  making  in  the  casjLflf  onn  utility 
only^  The  concurrent  actio-    uf  all  of  them  results 
in  setting  the"price  of  tHe15esl  coat  at  eighiylloTTars. 
It  is  a  very  practical  fact  that  the  rates  at  which 
all  fine  articles  sell  in  the  market  are  fixca_  k.    his 
way.    Such    articles    contain    utilities    unlike    each 
otlier.     They    have    power    to    render    .services    of 
varying   degrees   of   importance,   and   each   of   the 
several    .services    gets    its    normal    valuation    when 
producers  make  enough  to  supply  the  want  of  a 
particular  group  of   persons   to  whom  it   is  a  mar- 
ginal service  and  who  are  willing  to  pay  only  what 
it  costs.    They  would  go  without  that  one  service 
if  they  had  to  pay  more   for  it. 

Thin  Mftha({  rf  F"^'"<V""  ipplimh^f  fn  /\ll  Cnm- 
modilies  of  High  Grade.  —  Illustrations  of  this  prin- 
ciple  might  be  multiplied  indefinitely.  A  fine  watch 
tells  the  time  of  day,  but  something  that  would  do 


:J!.tea^g25i;^j:A^Mi.AL^>kiyi:A«^^ 


VALUE   AND   ITS    RKLATION   TO   INCOMKS 


113 


■'? 


that  rouKl  Ik>  Iiad  for  a  dollar,  and  that  is  all  that 
thi.s   fundamental    clcriK-nt   in    the   fine    watch   sells 
for.     It  takes  a  series  of  purchasers  bidding  on  the 
higher  utilities  of  the  fine  watch  to  make  it  sell  for 
five   hun<lred   dollars.     The  man   who   buys  such  a 
watch    W(.uld    give,    perhaps,    ten    thousand    for    it 
rather  tlian   be  without  a  watch  altogether,  but  he 
is  saved  from  the  necessity  of  doing  so  by  the  fact 
that  poorer  custtjmers  have  done  the  appraising  iu 
the  case  of  all  the  more  fundamental  qualities  which 
the  watch  po.sses.ses.     So  long  as  an  IngersoU  "dollar 
watch"  will  tell  the  time  of  day,  no  one  will  pay 
more  than  a  dollar  for  exactly  that  same  service 
rendered   by  any  watch   whatever;    and  the  same 
thitig  is  true  of  other  services.     Social  in  a  very 
concrete  and  literal  sense  is  the  operatio.i  of  fixing 
["■'CCS.     Only  the  simplest  and  cheapest  t.hitifr^  thnt 
are  sold  in  the  market  at  nil  Urlufr  j..cf  ^.}),j|  n,^, 
are  worth  to  the  buvers.  and  all  articles  of  l.i^u.r 
L^rade  offer  to  nil  ulw.  hnv  fl,..r»  a  e„rp|||..  (^f  ■■f-^y\fr 
not  offset   by  what  is  paid  for  them.     If  we  rule 
< >ut    the    cheapest    and    poorest __grades_ of   .".riicles 
we  find  all  others  affording  a  "consumers'  surplus."  * 

'  It  will  bo  seen  that  to  a  man  who  buys  the  seventy-five 
dollar  (o;it  that  article  in  its  entirety  i.s  the  final  one  of  its 
kind  which  he  will  buy.  He  does  not  want  a  second  coat 
exactly  like  the  finst.  The  same  thing  is  true  of  the  man 
who  buys  the  five  hundred  dollar  watch,  since  he  does  ncjt 
think  of  buying  more  than  one.  In  each  case  the  first  unit 
o(  the  article  bought  is  the  'ast  one,  and  it  contains  utilities 
which  are  worth  more  than  they  cost.  It  contains  one  utility 
only  which  is  marginal  in  the  true  sense  of  affording  in,  -urplus 
<if  gain  above  cost.  This  utility  stands  on  the  boundary 
line  where  consumers'  surpluses  stop. 


ill 


t 

i 

t 

{ 

. 

t 

f 

\ 

i 

f 

i 

% 


^1 


f; 


I J 


ii 


f 


;  It'     a  * 


CHAPTER  VII 


NORMAL   VALUE 


Natural  Supply.  —  We  have  attained  a  law  of 
maiket  value,  which  determines  the  price  at  which 
a  given  amount  of  any  conmiodity  will  sell,  and 
have  talien  a  quick  glance  at  the  influence  which 
fixes  the  amount  that  is  offered  and  thus  furnishes 
a  natural  standard  to  which  the  market  value  tends 
to  conform.  At  any  one  moment  the  amount 
which  is  supplied  is  an  exact  quantity,  and  if  it  all 
has  to  he  sold,  it  will  bring  a  price  which  is  fixed 
by  the  fii.al  uMlity  of  that  amount  of  the  commodity. 
If  the  quantity  ofT(>red  for  sale  should  become  greater 
or  less,  the  final  utility  and  the  price  would  change. 
Final  utility  controls  the  immediate  selling  price, 
and  if  that  is  above  the  cost  of  production,  a  margin 
of  gain  is  affonlc!  which  appeals  to  producers,  sets 
roinpctition  working,  and  brings  the  quantity  made 
up  to  the  full  amount  which  can  be  sold  at  cost. 
The  amount  of  the  supply  itself  is  therefore  not 
a  matter  of  chanco  or  caprice.  It  is  natural  that 
a  certain  quantity  of  each  article  should  be  supplied, 
and  that  the  price  should  hover  about  the  level 
which  the  final  uti'ity  of  that  (juantity  of  the  good 
fixes.  "Natural"  or  "normal"  price  is,  in  this 
view,  the  market  price  of  a  natural  quantity. 

Cost  as  a  Standard  of  Normal  Price.  —  It  is  com- 
monly and  correctly  stt;ted  that  the  normal  price 
of  anything  is  that  which  just  covers  the        t  of 

114 


NORMAL    V^ALUE 


115 


producing  ,t.    Cost  in  this  case  is  the  total  amount 
of  money  that  the  entrepreneur  pays  out  m  order 
to   bring  the  commodity  into  existence.     He  buys 
raw  materials  and  pays  frr  all  the  labor  and  capital 
hat  transform  them  --uu  .  r.cw  and  saleable  shape 
If  he  can  make  a  nc    p-ofit,  he  dees  so;  but  com- 
IK'tmon    tends    to    a    .:    the    ,uantity    produced 
and  the  consequent  price  \a  s.cl^  a  way  that  he  can 
nuke  no  net  profit.      What  he  gets  for  the  article 
vv.l   tnen  reimburse  him  for  his  total  outlay,  but  it 
will  do  no  more.      Since  the  quantity  produced  is 
normal  when  ,t  brings  the  market  price  to  this  level 
of  cost,  It  appears  that  the  cost  is  the  ultimate  stand- 
ard in  the  case.     The  quantity  supplied  varies  till 
It  causes  the  market  price  just  to  cover  the  cosf 
am.  so  long  as  the  quarMty  supplied  is  thus  natural,' 
other  mfluences  remaining  the  same,  the  price  is 
so.     Ihis  states  the  cost  of  production  in  terms  of 
mon(>y   paul   by  an    entrejrreneur  and    the   returns 
rom  the  operation  as  money  received  by  him ;    but 
tliere  ,s  a  more  philosophical  way  of  conceiving  the 
law  of  cost,  and  to  this  we  shall  soon  recur 

Element,    of   Cost.  -  Whatever    the   entrepreneur 
has  to  pay  for  in  the  production  of  an  article  is  of 
course  an  element  in  its  monetary  cost  to  him      If 
he  do,>s  not  begin  the  making  of  it  by  drawing  his 
raw   materials   from   what   nature   freely   furnishes 
'u."  must  pay  some  one  for  the  raw  material.     He 
must  also  pay  for  the  labor,  and  this  is  equivalent 
to   buying   th<-   fraction   of   the  article  that  is  pro- 
<  i"'''<l  I'y  labor;   for  the  laborer,  as  we  have  seen,  is 
the  producer  of  a  certain   fractional  share  of  the 
article   ""-'   •^' 


!'^  and  the  natural 


wlien  he 


owiuT  of  that  share,  and 


;  \ 


t  * 


agrees  to  let  his  labor  for  h 


ire,  what  he 


I 


ill 


•*u 


i 

i 


116 


ESSENTIALS    OP   ECONOMIC   THEORY 


lil 


H- 


really  does  is  to  soil  out  his  individual  interest  in 
the  forthcoming  product  of  the  industry  in  which 
he  is  about  to  engage.  When  a  workman  in  a  shoe 
factory  agrees  to  work  for  two  dollars  and  a  half 
a  day,  he  really  contracts  to  s-oll  every  ilay  for  that 
amount  a  certain  quantity  of  shoes.  The  leather 
is  one  element  which  enters  into  the  finished  shoes, 
and  therefore  the  entire  shoe  is  not  really  made 
in  the  factory;  but  of  the  part  which  is  there  matle, 
namely,  the  utility  that  results  from  transforming 
the  leather  into  shoes,  one  part  is  made  by  labor 
and  another  by  capital.  The  entrepreneur  has  to 
buy  both  cf  these  if  he  is  to  acquire  a  valid  title  to 
the  product  and  have  a  right  to  sell  it.  These  costs 
are  therefore  "purchase  money"  paid  for  undivided 
shares  of  goods. 

Labor  of  Management.  —  It  usually  happens  that 
an  entrepreneur,  or  employer  of  labor  and  capital, 
performs  some  labor  himself;  and  we  have  already 
noted  the  reason  for  thi.  in  the  fact  that  the  kind 
of  labor  that  he  performs  is  so  important  that  the 
fate  of  the  business  often  depends  on  it.  He  may 
manage  the  business  so  well  as  to  make  it  succeed 
or  so  ill  as  to  make  it  fail.  He  pays  himself  for 
this  labor  when  he  draws  a  salary  for  his  services. 
As  an  entrepreneur  he  treats  his  own  labor  as  he 
does  that  of  any  one  else  and  buys  the  fraction  of 
the  product  of  his  business  that  his  own  labor  of 
management  has  created.  In  this  he  illustrates 
the  general  law  that  all  payments  of  wages  are 
payments  of  the  purchase  of  a  certain  quantity  of 
product.  Though  the  owner's  own  contribution 
to  the  product  is  not  always  mentioned  in  terms 
in  the  accounting,  that  is  what  his  salary  is  paid 


..-.^  .'':.:: jj 


NORMAL    VALUE 


117 


for,  though  it  is  spoken  of  as  a  payment  for  his 
"time,"  or     is  labor. 

The  Capitalist  as  the  Vender  of  a  Share  in  a  Prod- 
vet.  —  Capital,  as   we   have   seen,  also   contributes 
a  definite  share  toward  the  total  amount  of  every 
product  in  the  making  of  which  it  cooperates.    Labor 
does   not  do  all   the  transforming  of  leather  into 
shoes  which  is  done  in  the  factory,  since  machines, 
fuel,  etc.,  help:  and  we  shall  later  find  that  there  is 
a  way  of  determining  how  much   of  the  product 
the  help  so  given  creates.     It  adds  a  certain  amoL  it 
to  what  labor  can  claim  as  its  own  special  product, 
and  the  man   who  owns  the  capital   becomes  the 
lawful   claimant    for   this   additional   share.     When 
he  agrees  to  let  his  capital  work  for  an  employer, 
he   virtually   sells   to   the   employer  the   undivided 
share  of  the  product  —  shoes  or  what  not  —  that 
the   capital   really   creates.     The   furnisher   of   pro- 
ductive   instruments,    like    the    furnisher   of   labor, 
is  a  vender,  and  the  entrepreneur  is  a  buyer. 

Entrepreneur  and  Capitalist.  —  As  was  stated  in 
an  earlier  chapter,  an  actual  employer  nearly  always 
furnishes  some  of  the  capital  that  he  uses.  If  he 
did  not  do  so,  he  would  have  difficulty  in  borrowing 
more,  since  banks  or  other  lenders  do  not  loan  to 
empty-handed  men.  It  is  clear  that  what  the 
employer  gets  in  return  for  such  capital  as  he  may 
put  into  the  business  is  in  reality  a  payment  for 
a  contribution  which  that  particular  part  of  the 
capital  makes  to  the  product.  Since  each  bit  of 
capital  in  an  establishment  contributes  something 
toward  the  creating  of  the  product,  the  employei  's 
own  cai>ital  has  the  same  right  to  the  value  of  its 
contributary  share  as  has  the  capital  of  any  one 


IV 


in 


1    i 


I' 


i4 


118 


ESSENTIALS    OF    ECONOMIC    THEORY 


else.  What  the  employer-capitalist  gets  for  capita' 
the  employer,  pure  and  simple,  pays.  As  the  fui 
nisher  of  instruments  the  man  is  a  vender  of  the 
product  of  these  instruments,  while  as  an  entre- 
preneur proper  he  is  the  buyer.  He  must  purchase 
the  product  of  his  own  capital  just  as  he  purchased 
the  product  of  his  own  labor.  In  paying,  therefore, 
wages  for  all  labor,  including  what  he  performs 
himself,  interest  on  all  capital,  including  his  own, 
and  the  price  of  raw  materials,  ho  gets  something 
which,  if  competition  does  a  [)orfect  work,  he  has 
to  sell  for  what  he  gives  for  it.  The  shoes,  when 
he  sells  them,  tend,  under  active  comjx'tition,  to 
yield  only  what  has  been  paid  for  them  in  the  mak- 
ing and,  in  a  pertcctly  static  state,  would  actually 
yield  no  net  proht.  All  the  enl^eprencnf )^  costs, 
therefore,  resolve  themselves  into  purchase  money 
paid,  his  receipts  are  money  accruing  from  sales; 
and  under  ideally  free  competition  the  two  sums 
total   are   equal. 

The  Entrepreneur' s  Proper  Function  not  Labor  of 
Management.  —  In  some  theoretical  discussions  the 
management  of  a  business  figures  as  the  principal 
function  gf  the  entrepreneur,  and  all  or  nearly  all  of 
the  reward  that  comes  to  him  is  r(>presented  as 
coming  in  the  shape  of  a  reward  for  a  responsible 
kind  of  labor  that  calls  great  abilities  into  requisi- 
tion. But  it  is  very  clear  that,  whether  he  per- 
sonally performs  any  labor  or  not,  the  employer 
has  a  distinctly  mercantile  function  to  perform; 
and  this  in  itself  is  totally  unlike  the  work  of  over- 
seeing the  mill,  the  shop,  or  the  salesroom.  He 
acquires  a  title  to  the  whole  product  by  paying 
for  the   contributions   which    labor    and   producers 


■\ 


NORMAL   VALUE 


119 


of  raw  material  separately  make  toward  it,  and  then 
parts  with  the  product;  and  if  he  gets  any  more 
than  he  has  paid  out,  he  makes  a  profit.  When 
industry  is  ui  what  we  have  termed  a  dynamic 
state,  such  a  difTerence  between  the  value  of  the 
product  and  the  cost  of  the  el(>meiits  that  go  into 
it  is  continually  appearing,  and  that,  too,  la  ^ely 
in  consequence  of  cau.s(>s  over  which,  as  a  mere 
manager,  the  employer  has  no  control.  A  profit 
so  gained  cannot  be  wages  of  management.  It  Is 
a  purely  commercial  gain,  or  a  difTerence  between 
what  is  paid  for  something  and  what  is  received 
for  it. 

Mercantile  Profit.  —  It  is  best,  therefore,  to  dis- 
tinguish in   some   perfectly  clear  way  between  that 
function  of  the  entrepreneur,  which  consists  in  buy- 
ing and  selling,  and  any  work  that  he  may  find  it 
best  to  do  in  the  way  of  superintending  the  busi- 
ness.    At  the  cost  of  using  the  term  entrepreneur 
in  a  stricter  sense  tlian  the  one  customarily  attached 
to  it,  we  will  make  this  word  describe  the  purely 
mercantile  functionary  who  pays  for  the  elements 
of  a  product  and  then  sells  the  product.     The  reason 
for  the  very  division  between  gains  from  this  source 
and  gains  from  management  we  shall  soon  appre- 
ciate,  for  we  shall  see  that  competition  tends  to 
reduce  one  of  these  incomes  to  nothing,  but  tends 
to  perpetuate  the  other  and  to  make  the  amount  of 
it  conform   to  a   positive  standard.     The  entrepre- 
neur, as  we  shall  use  the  term,  is  neither  the  manager 
nor  the  capitalist,  and  when  we  have  occasion  to 
speak  of  either  of  these  functionaries,  we  shall  call 
him  by  his  own  distinctive  name ;   though  we  know 
perfectly  well  that,  in  actual  business,  it  is  desir- 


)  t 


\     \ 


M 
!  I 


i' 


J-     if-. 


; 


IJ 


i    ' 


■f 


^illl 


^ 


I 


Uh 


ill! 


120 


ESSENTIALS    OF    ECONOMIC   THEORY 


able  and  often  quite  essential  that  the  same  one 
who  acts  as  an  cntrejrreneur  should  also  put  into 
the  business  some  labor  as  well  as  some  capital. 
A  man  who  performs  two  unlike  functions,  buying 
and  selling,  on  the  one  hand,  and  managing  the 
business,  on  the  other,  serves  in  two  capacities  that 
are  clearly  distinguishefl  from  each  other;  while  if 
he  furnishes  any  of  the  capital,  he  adds  to  tliese 
a  third  capacity  entitling  him  to  the  value  of  the 
product  of  his  capital.  As  a  manager  he  directly 
aids  in  producing  goods,  and  he  gets  pay  for  so 
doing  from  his  other  self,  the  entrepreneur,  who 
acfjuires  the  title  to  the  goods;  as  a  capitalist  he 
has  another  legitimate  claim  upon  himself  as 
enlrepreneur. 

These  Difftinctinna  recognized  in  Practical  Ac- 
cnnnting.  —  That  this  is  no  bit  of  mere  theoretical 
subtlety  is  proved  by  the  fact  that  the  bookkeep- 
ing of  nearly  all  establishments  distinguishes  be- 
tween these  two  incomes  by  actually  putting  an 
appraisal  on  the  work  the  employer  does  and  pay- 
ing a  salary  for  it.  A  man  may  be  a  large  owner 
of  stock  in  a  corporation  and  yet  receive  a  salary 
that  is  fixed  by  an  estimate  of  what  an  equally 
useful  man  could  be  hired  for.  If  personal  influence 
secures  more  for  him  than  this,  the  excess  is  taken 
from  the  pockets  of  the  stockholders,  and  the  amount 
of  it  is  accounted  for  in  a  way  that  tloes  not  fall 
within  the  scope  of  pure  economic  law. 

IIow  "Natural"  Prices  exclude  EtUrepreneiir's 
Profits.  —  The  old  and  correct  view  is  that  the 
tendency  of  competition  is  to  make  things  sell  for 
enough  to  cover  all  costs,  as  we  have  defined  them, 
and  no  more.    Under  a  different  phraseology  this 


NORMAL    VALUE 


121 


Is  what  Ricardo  and  others  have  rightly  claimed. 
They  were  unconsciously  explaining  what  would 
happen  in  a  static  state,  for  if  society  were  actually 
in  this  state,  the  goods  that  come  out  of  the  factory 
would  be  worth  just  enough  to  reimburse  the  owner 
for  all  the  outlays  that  can  be  called  costs.  If  they 
sell  for  more  than  this,  there  is  to  be  had  from  the 
business  an  income  that  costs  nothing.  It  is  a  net 
profit  above  all  claims  based  on  personal  labor  or 
on  the  aid  furnished  by  capital,  and  it  furnishes 
an  incentive  for  enlarging  the  business,  and  labor 
and  capital  are  therefore  drawn  into  it.  Entre- 
preneurs bring  them  and  for  a  time  make  a  profit 
by  this  means;  but  as  their  presence  increases  the 
output  of  goods  that  arc  here  made,  it  brings  down 
the  price  till  there  is  no  inducement  to  move  any 
more  labor  and  capital  in  this  direction. 

The  Significance  of  a  Natural  Adjustment  of  Dif- 
ferent Industries. —  The  "natural"  state  of  general 
industry  is  that  in  which  each  particular  branch  of 
it  is  in  the  no-profit  state.  It  is  as  though  laborers 
and  capitalists  in  a  shoe  factory  took  all  the  shoes 
that  it  turns  out,  sold  them  in  a  market,  paid  for  the 
raw  material  out  of  the  proceeds,  and  kept  the  re- 
mainder, dividing  it  between  themsel.es  in  pro- 
portions which  corresponded  with  the  amounts 
they  had  severally  contributed  toward  the  making 
of  this  product;  and  as  though  the  laborers  in 
cotton  mills  and  iron  foundries  received  the  goods 
there  made  and  dealt  with  them  in  a  like  manner. 
It  is  as  though  in  every  branch  of  business  the  whole 
product  were  turned  over  in  kind  to  the  furnishers 
of  labor  and  capital. 

The    Entrepreneur   a    Passive    Functionary    under 


i  ♦ 


'    f 
i 


i  s: 


I    '■ 


n 

i! 

it 


I 


122 


ESSENTULS    OF   ECONOMIC   THEORY 


Static  Conditions.  —  Purely  passive  is  the  function  of 
the  entrepreneur  under  static  conditions.  In  so  far 
as  any  effect  on  his  income  is  concerned  he  might  as 
well  reside  in  a  foreign  land  as  in  the  one  where  his 
business  is  located,  provided  always  that  the  manage- 
ment were  unaffected.  When  the  same  man  is  both 
entrepreneur  and  manager,  the  absence  of  the  first  of 
these  functionaries  would  mean  the  absence  also  of 
the  second,  and  that  would  cause  trouble;  but  the 
purely  mercantile  operation  of  getting  a  title  to  a 
product  and  then  surrendering  it  can  be  carried  on  as 
well  in  one  [ilace  as  in  another.  The  entrepreneur  in 
his  capacity  of  buyer  and  seller  does  not  even  do  the 
work  which  purchases  and  sales  involve.  That  is 
commonly  done  by  agents.  Some  of  it,  of  course, 
may  be  done  by  the  responsible  manager  himself, 
and  if  that  person  is  also  the  entrepreneur,  it  follows 
that  he  does  a  part  of  the  commercial  labor  of  his 
business.  In  this,  however,  he  goes  beyond  his  func- 
tion as  entrepreneur.  In  that  capacity  he  does,  as 
we  have  said,  no  labor  of  any  kind.  Sales  and  pur- 
chases are  made  in  his  name,  but  he  does  none  of  the 
work  that  leads  up  to  them.' 


HI 

lit] 


i 

i 


'  The  holders  of  common  stock  in  a  corporation  are  always 
entrepreneurs,  and  tlioy  are  also  cafjitalists  if  the  stock  rep- 
resents any  real  capital  actually  paid  in.  If  the  bonds  and 
the  preferred  stock  represent  all  the  real  capital  that  there  is, 
any  dividends  that  may  be  paid  on  the  common  stock  are 
a  pure  entrepreneur's  profit.  If,  on  the  other  hand,  the 
stock  all  represents  money  actually  put  into  the  business, 
the  dividends  on  it  contain  an  element  of  net  profit  if  they 
exceed  simple  interest  on  the  capital  and  insurance  against 
the  risks  that  are  not  guarded  against  by  actual  insurance 
policies.  If  the  rate  of  simple  interest  is  four  per  cent,  .and 
the  value  of  the  unavoidable  risk  is  one  per  cent,  then  a  divi- 
dend of  six  per  cent  contains  a  pure    entrepreneur's    profit 


NORMAL    VALFR 


123 


How  the  Entrepreneur  contrihutes  to  Production 
under  Dynamic  Conditions.  —  In  a  dynamic  state  the 
entrepreneur  emerges  from  this  passive  position. 
He  TTakes  the  supreme  decisions  which  now  and 
again  lead  tc  changes  in  the  business.  "Shall  we 
adopt  this  new  machine?"  "Shall  we  make  this 
new  product?"  "Shall  we  enter  this  new  market?" 
are  questions  which  are  referred  to  him,  and  on  the 

of  one  per  cent.  In  dynamic  conditions  buch  a  return  is 
often  to  be  expected,  and  we  shall  soon  study  the  conditions 
that  afford  it. 

In  the  present  study  we  do  not  need  to  con.sidcr  risks 
inasmuch  as  the  greater  part  of  them  arise  from  dynamic 
causes;    that  is,  from  the  changes  and  di.sturbanccs  to  which 
the  business  world  is  subject.     An  invention  promises  greatly 
to  cheapen  the  production  of  some  article  and,  for  a  time 
to  msure  large  returns  for  the  men  who  first  utilize  it      A 
capitalist  may  be  willing  to  take  a  risk  for  the  sake  of  shar- 
ing this  gain;    but  in  time  both  th.->  risk  and  the  gain  will 
vanish.    The  capacity  of  the  new  appliances  will  have   to 
be  tested,  a  market  for  their  output  found,  etc     A  small 
remainder  of  risk  is  still  entailed  upon  the  capitalist  if  he 
leaves  his  money  in  this  business.     The  death  of  the  manag- 
ing partner,  the  defaulting  of  payments  for  goods  sold    the 
chances  of  unwise  or  dishonest  conduct  on  the  part  of  clerks 
or  overseers,  always  impend  over  a  business,  but  tlie.se  dangers 
are  at  a  minimum  when  t       man  who  is  at  the  head  of  the 
force  of  managers  has  capital  of  his  own  in  the  busino.. 
Risks  are  at  a  static  level  only  when  they  are  thus  reduced- 
and  for  our  present  purpose  it  is  best  to  consider  that  com- 
petition has  eliminated   the  establishments  where  any  reck- 
lessness has   been  shown   in   the   management,   and  that  the 
unavoidable  remainder  of  risk  resolves  itself,  nearly  enough 
for  practical  purposes,  into  a  deduction  from  the  product  which 
the  surviving  establishments   turn   out   in    a   long   period   of 
time.     A   small   percentage   of  their   ann  ,al   gains,  .«et   aside 
for  meeting  unavoidable  lo.sses.  will  make  good   these  losses 
a^  they  ,>rn..,r  -ind  leave  the  businesses  in  a  .■on.iition  in  which 
they  can  yield  :n  a  steady  return  to  owners  of  stock   to  lend- 
ers of  further  capit  ;1,  and  to  laborers  all  of  their  real  product 


I  ! 

Ill 

:  i! 


,•  ) 


1  , 


!       ) 
!       \ 


11 


n  ] 


Ml 


124 


ESSENTIALS   OP   ECONOMIC   THEORY 


drcisiona  ho  roaches  doponds  the  prospects  of  profit 
for  the  buwiness.  This  activity  is  not  ordinary  labor, 
but  in  a  true  sense  it  is  a  productive  activity,  since 
it  results  in  placing  labor  and  capital  where  they 
can  produce  more  than  they  have  flone  and  more 
than  they  could  do  were  it  not  for  the  enabling  act 
of  the  entrepreneur  which  pl?-es  them  on  a  vantage 
ground  of  superiority.  This  subject  will  be  discussed 
in  a  later  chapter  and  in  connection  with  other  phases 
of  economic  dynamics. 

Values  at  a  Static  Level  only  when  Entrepreneurs' 
Gains  are  Nil.  —  Any  net  profit  on  an  entrepreneur's 
part  means  that  his  product  is  selling  for  more  than 
the  elements  of  it  have  cost  him.  Hut  this  is  a  con- 
dition which,  if  labor  and  capital  are  as  mobile  as  the 
static  hypothesis  requires  that  they  should  Ite,  will 
cause  t'l's  cntrejrrcnew  and  others  to  move  labor  and 
capital  P!lo  his  indu.-itry,  thus  increasing  its  output 
and  lowering  the  selling  price  of  its  product.  If  there 
is  no  such  action  going  on,  it  shows  that  the  entre- 
preneurs  have  no  incentive  for  taking  it. 

Values  at  a  Static  Level  only  when  the  Gains  of 
Labor  in  the  Different  InduMries  are  Equalized.  — 
If  labor  is  creating  more  in  one  subgroup  than  in 
others,  as  it  often  is  in  a  dynamic  condition,  that  fact 
means  that  some  entrepreneurs  are  making  a  profit, 
and,  according  to  the  principle  stated  in  the  preced- 
ing paragraph,  this  means  that  values  are  not  at  their 
static  or  "natural"  level.  If,  owing  to  new  methods 
or  to  some  other  cause,  a  given  amount  of  labor*  in 


'  In  mpasuring  labor  we,  of  course,  take  account  of  the 
quality  of  the  men  who  perform  it,  :iiul  the  work  of  a  Bkillfui 
man  is  counted  as  more  units  of  labor  than  that  of  an  un- 
skillful one. 


NORMAL    VALUE 


125 


the  subgroup  that  producod  the  A'"  of  our  table 
croatt's  au  amount  of  that  jjroiluct  whicli  sclis  for  more 
than  the  B'"  or  the  C"  which  lHl)or  of  Hkc  (juantity 
makes,  then  the  manufacturers  of  A'"  would  obviously 
get  a  margin  of  pn^fit.  They  would  not  be  oblif^cd  to 
pay  for  labor  any  more  than  the  market  rate, and  that, 
as  we  shall  see,  eaimot  exceed  wliat  labor  produces  in 
the  gr  .ips  13'"  and  C".  In  A'"  the  labor  creates 
more  and  the  employer  pockets  the  difference.  In 
saying  this  we  assume  one  fact  which  we  undertake 
later  to  prove ;  namely,  that  there  is  a  definite  amount 
of  each  product  which  can  lie  attributed  to  labor 
alone  as  its  producer.  Capital  and  labor  work  to- 
gether, but  ea(  h  is,  in  effect,  the  creator  of  a  certain 
fraction  of  their  joint  product. 

Values  Static  only  ^^•hen  the  Cains  of  Capital 
in  Different  Industries  are  Equalized.  — ]{  capital 
is  creating  more  in  one  industry  than  in  another, 
there  is  a  margin  of  profit  for  the  entrcjrreneurs 
in  the  exceptionally  productive  industry.  They 
pay  as  interest  on  the  capital  they  use  only  the 
market  rate,  which  is  what  equal  amounts  of 
capital  can  produce  and  get  elsewhere.  If  they 
produce  more  in  the  one  group,  the  entrepreneurs  there 
can  pocket  the  excess  as  they  did  in  the  case  of  the 
product  of  labor.  We  assume  that  there  is  everywhere 
a  definite  product  that  can  be  attributed  to  capital 
alone. 

Values  Normal  when  Moneys  jxiid  out  by  Entre- 
preneurs equal  Moneys  Received.  —  In  the  precetling 
paragraphs  we  have  spoken  of  exchange  values  as 
being  static  undei  certain  conditions,  but  we  might 
have  expressed  the  essential  fact  by  saying  that 
prices  are  static  under  these  conditions  since  the  money 


!l 


'  '  |. 


t 


i' 


ill 


126 


KSSENTIALS   OF    ECONOMIC   THEORY 


a  product  brings  is  a  true  expression  of  its  value. 
If  A'"  sells  for  as  many  dollars  as  does  H'",  the  two 
things  exchange  for  each  other.  In  like  nianniT  the 
product  of  labor  ami  that  of  capital  may  be  expre.s.sed 
in  terms  of  money,  since  die  (luantities  of  goods  which 
they  respectively  make  .sell  for  certain  sums.  Wages 
and  interest  are  nearly  always  conceived  in  terms 
of  money.  The  commercial  mode  of  com|)uting  costs 
of  production  and  returns  from  production  is  to 
translate  them  into  moneys  paid  by  entrepreneurs 
and  moneys  received. 

CoKts  of  Production  as  related  to  Static  Incomes.  — 
What  to  an  intrepreneur  are  costs  arc  to  workmen 
and  capitalists  incomes.  The  one  pays  out  wages 
and  interest,  and  the  others  get  them;  and  these  two 
sums  are  normal  when  together  they  e(]uaJ  the  prices 
received  for  goods  produced.  The  entrepreneur  is  the 
universal  paymaster,  and  in  a  static  condition  all 
incomes  come  from  his  hand. 


.  1 1 


! 


I 


If 


CHAPTER  VIII 


WAGES 

The  Equilibrium  of  Itidustrial  Groups.  —  The  differ- 
ent industrial  groups  aro  in  ('(luilibriurn  when  they 
attract  labor  and  capital  eiiually,  and  that  occurs 
when  these  agents  produce  as  much  per  unit  employed 
in  one  group  as  in  another.  Such  equalized  pro- 
ductivity is  the  bottom  fact  of  a  static  condition,  and 
equalized  pay  follows  from  it.  Wages  and  interest 
tend  to  be  uniform  in  all  the  groups.  Efficient  labor, 
of  courst',  gets  in  any  employment  more  than  ineffi- 
cient ;  but  labor  of  a  given  grade  gets  in  all  the  groups 
that  make  up  industrial  society  a  uniform  rate  of 
pay.  and  nothing  is  to  be  gained  by  any  capitalist 
or  bv  any  laborer  by  moving  from  one  employmiint 
to  another.  They  all  therefore  stay  where  they  are, 
nor  because  they  cannot  move  fri'ely  if  they  wish  to 
do  so.  but  because  no  inducement  to  move  is  offered  to 
them.  Tliis  is  a  condition  of  perfect  mobility  with- 
out :iioT,io;:  -  of  atoms  ready  to  move  at  a  touch  with- 
ouT  th^  ^ou(h  that  vvould  move  them.  The  paradox 
inu—u  :oiu.s  trat  it  is  the  ideally  perfect  mobility 
whicii  isi  -xi-n-:  in  the  past  which  positively  ex- 
ci-uiu-  !sraon  ir  the  present.  At  sometime  in  the 
n&s  laiAjT  -•=  -tpital  have  gone  from  group  to  group 
:iL  -se^  oifc".  ough:  about  an  adjustment  in  which 
zbt^  uisr-  211  mrentive  for  moving  farther.  The 
-iirSiC!  jr  .  prft  ,1  Of  water  is  kept  tran(]uil,  not  because 
tfe  vTO£«r  is  ^t  pertectly  fluid,  but  because,  in  spite 

127 


f 


IS  ■-; 

ill! 


128 


ISSENTIALS  OP  ECONOMIC  THEORY 


of  the  fact  that  it  can  flow  with  entire  freedom  in  any 
direction  if  it  is  injpelled  more  in  that  direction  than 
in  any  other,  each  particle  of  it  is  impelled  equally 
in  all  directions.  It  is  the  perfect  equilibrium  that 
keeps  the  particles  from  changing  their  places,  and 
fluidity  has  caused  the  eciuilibrium.  In  like  manner 
when  labor  and  capital  can  create  and  get  just  as 
much  in  one  place  as  in  another,  they  are  attracted  as 
strongly  in  one  direction  as  in  another  and  therefore 
do  not  move.  A  young  man  of  average  capacity, 
who  is  deliberating  upon  the  choice  of  an  occupation, 
will  find  that  he  can  do  as  well  in  a  cotton  mill  as  he 
can  in  a  shoe  factory,  a  machine  shop,  a  lumber  mill, 
a  flouring  mill,  or  any  other  industrial  establishment 
retjuiring  his  particular  grade  of  capacity.  This  is 
the  picture  of  a  perfectly  static  industrial  condition. 
Economic  science  has  to  account  for  values,  wages,  and 
interest  as  they  would  he  in  such  a  condition,  however 
impossible  it  is  that  society  should  ever  reach  exactly 
such  a  state.  The  values,  wages,  and  interest  in  a 
real  market  are  forever  tending  toward  the  rates  that 
would  be  established  if  the  static  condition  were 
realized. 

The  Sign  of  a  Static  State.  —  The  sign  of  the  exist- 
ence of  a  static  condition  is,  therefore,  that  labor  and 
capital,  though  they  are  perfectly  free  to  move  from 
one  employment  to  another  and  would  actually  do 
so  on  the  slightest  inducement,  still  do  not  move. 
They  stay  where  they  are  liecause  th(>y  cannot  find 
places  where  they  can  produce  the  slightest  amount 
in  excess  of  what  they  now  produce,  and  no  employer 
will  anywhere  offer  any  excess  above  the  prevailiner 
rate  of  pay. 

Profits  and  the  Movements  they  induce  the  Sign  of  a 


WAGES 


129 


Dynamic  State.  —  Entrepreneur's  profits,  when  they 
exist,  mean  that  this  equilibrium  is  disturbed,  and 
when  it  is  so,  mobility  of  labor  and  capital  affords  the 
guaranty  that  a  new  equilibrium  will  be  established 
if  no  further  disturbances  follow.  As  we  have  said, 
profits  attract  labor  and  capital,  increase  the  output 
of  those  goods  which  yield  the  profit,  and  reduce  the 
prices  of  them  to  the  no-profit  level.  Worknien  and 
capitalists  tli(>n  get  from  the  entrepreneur  as  wages  and 
int(  rest  all  that  he  gets  from  the  public  as  the  price 
of  his  goods,  exc(>pt  what  he  pays  for  raw  materials.' 
In  other  words,  the  employer  sells  his  goods  at  cost. 

'  The  eritrcpreruur  of  A'  of  our  table  must  buy  the  A  in 
order  to  impart  to  it  that  utility  which  is  his  own  particular 
contribution.  He  pays  as  wages  and  interest  all  that  he  gets 
for  this  contribution.  The  true  product  of  the  ttUnpreneur  is 
not  the  entire  price  of  the  A',  but  is  the  difference  between 
that  and  the  price  of  the  A.  The  entire  amount  received 
for  the  A'  resolves  itself  into  wages,  interest,  and  cost  of  A; 
but  as  a  rule  the  price  of  A  n-solves  itself  practically  into 
wages  and  interest  only,  and  when  it  does  so,  all  that  is  paid 
for  the  A'  ultimately  takes  thes<i  forms.  The  same  is  then 
true  of  the  finished  product  A'".  The  entire  price  of  it  is 
ultimately  resolvable  into  wages  and  interest;  and  in  speak- 
ing of  the  product  (jf  an  entire-  group  we  do  not  need  to  make 
any  reservation  for  raw  materials. 

The  (ase  in  which  this  statoment  requires  qualification 
is  that  in  which  the  material  in  its  rawest  state  still  has  value, 
as  is  the  case  with  ore  and  mineral  oil  contained  in  the  earth 
but  not  a  true  part  of  land  in  the  economic  sense,  since  they 
are  exhausted  in  the  using.  The  price  of  a  product  into 
which  thrje  elements  enter  includes  scmiething  that  repre- 
sents the  value  which  they  have  in  situ  and  before^  any  labor 
has  been  expended  on  them.  It  is  true  even  in  these  ca.ses 
that  the  value  of  the  product  is  measured  in  terms  of  wages 
and  interest,  provided  that  the  exhaustible  elements  such 
as  ore,  oil,  etc  ,  are  Ciipuble  of  being  repliiii.shed,  or  provided 
that  an  effective  substitute  for  them  is  in  process  of  produc- 
t!-n  by  nR-arr-;  of  labor  and  capital.  The  natural  raw  material 
is  then  worth  what  the  artificial  substitute  costs  in  terms  of 


,» 


I J 


ill 


^  V  ■ 


^-  I& 


130 


ESSENTIALS   OP  ECONOMIC  THEORY 


m 


How  Costs  are  Determined.  —  The  early  studies  of 
"natural"  values,  or  values  which  conform  to  costs 
of  production,  were  unconscious  and  imperfect  at- 
tempts to  attain  the  laws  of  value  in  a  static  state. 
In  such  a  state  costs  resolve  themselves  into  wages  and 
interest,  and  the  conception  of  such  a  static  state  is 
therefore  not  complete  unless  we  know  how  wages 
anil  interest  themselves  are  determined.  What  we 
have  already  said  implies  that  they  fluctuate  about 
certain  standards,  just  as  do  the  prices  of  goods,  and 
that  they  would  remain  at  these  standards  if  society 
were  reduced  to  a  static  condition. 

Significance  of  Static  Law  in  a  Dynamic  State.  — 
An  actual  society  is  undergoing  constant  disturbances. 
It  is  very  far  from  being  static;  and  yet  values  of 
goods,  on  the  one  hand,  and  the  earnings  of  labor  and 
capital,  on  the  other,  hover  within  a  certain  distance 
of  the  standai'ds  which  would  be  realized  if  the  society 
became  static.  In  spite  of  active  dynamic  move- 
ments the  general  returns  of  labor  and  capital  can 
never  range  so  far  from  these  theoretical  amounts  that 
the  distance  from  them  cannot  in  some  way  be  meas- 
ured and  accounted  for.  The  sea,  when  gales  are 
blowing  and  titles  are  rising  and  falling,  is  anything 
but  a  static  ol)ject,  and  yet  it  kee[)s  a  general  level 
in  spite  of  storms  and  tides,  and  tiie  surface  of  it  as  a 
whole  is  surjjrisingly  near  to  the  ideal  mathematical 
surface  that  would  be  presented  if  all  disturbances 
were  to  cease.  In  like  manner  there  are  certain 
influences  that  are  disturbing  the  economic  equilibrium 

capital  and  labor,  and  the  finished  product  which  contains 
some  of  the  natural  material  sells  for  the  amount  which  the 
finished  product  costs,  which  is  made  fiUncether  by  labor  and 
capital  applied  to  valueless  elements  in  nature. 


'■■M* 


WAGES 


131 


just  as  storms  and  tidal  waves  disturb  the  equilibrium 
of  the  sea.    We  cannot  actually  stop  these  influences 
any  more  than  we  can  stay  the  winds  and  the  lunar 
attraction;    but  we  can  create  an  imaginary  static 
state  for  scientific  purposes,  just  as  a  physicist  by  a 
process  of  calculation  can  create  a  hypothetical  static 
condition  of  the  sea  and  discover  the  level  from  which 
heights  and  depths  should  be  measured.    No  more 
than  the  economist  can  he  actually  bring  the  subject 
he  IS  dealing  with  to  a  motionless  condition.    The 
economic  ocean  will  defy  any  modern  Canute  who 
may  try  to  stop  its  movements;   but  it  is  necessary 
to  know  what  shape  and  level  it  would  take  if  this 
were  done. 

Influences  tfiat  disturb    the   Static  Equilibrivm  — 
The  influences  that  disturb  the  economic  equilibrium 
are,  m  general,  five.    The  population  of  the  world 
increases,  and  this  is  one  influence  which  prevents 
values,  wages,  and  interest  from  subsiding  to  per- 
fectly "natural"  standards.    Capital  is  increasing, 
and  this  influence  also  acts  as  a  disturbing  factor.' 
The  methods  of  producing  things  change,  and  the 
changes  have  a  very  powerful  effect  in  preventing  the 
attainment  of  a  static  equilibrium.^New  modes  of 
organizing  different  industries  are  coming  into  vogue, 
and  this  causes  a  further  disturbance  of  the  economic 
adjustment.    The   .vants  of  men  are  by  no  means 
fixed ;  they  change,  multiply,  and  act  on  the  economic 
condition  of  society  in  a  way  that  affects  the  static 
adjustment.     Even  physical  nature  undergoes  change 
and  the  perishable  part  of  the  earth  does  so  in  a  dis- 
quieting way.     We  are  using  up  much  of  our  natural 

mherifaufo      A«  thn  oFfi-t   t-(  *u\^   -  j  •  t 

.  -^     "■'    cnttt   ot   this   appears   ehieny 

in  forcing  us  to  change  our  processes  of  production,  we 


:■  \' 


4 


l'^ 


U 


132 


ESSENTIALS   OF   ECONOMIC   THEORY 


shall,  for  convenience,  limit  our  study  to  the  five 
changes  here  enumerated. 

Movement  Inevitable  in  the  Dynamic  State.  —  These 
influences  reveal  their  presence  by  making  labor  and 
capital  more  productive  in  some  places  than  they  are 
in  others,  and  by  causing  tht-m  ever  and  anon  to  move 
from  places  of  less  productiveness  to  places  where 
gains  are  greater.  As  we  have  said,  this  moving  of 
labor  and  capital  to  and  fro  is,  like  currents  in  the 
sea,  a  sign  of  a  dynamic  condition.  As  in  the  static 
state  these  agents  would  not  thus  move,  however 
fluid  and  mobile  they  might  be,  so  in  a  dynamic 
state  they  are  bound  to  move,  because  their  earning 
powers  do  not  remain  long  exactly  equal  in  any  two 
employments,  and  they  go  now  hither  and  now  yon, 
as,  in  the  changeful  system,  openings  for  increased 
gains  present  themselves.  If  commodities  were 
everywhere  selling  at  cost  prices  and  if  wages  and 
interest  wore  everywhere  normal  and  uniform,  labor 
and  capital  would  not  move  to  and  fro,  and  this  would 
be  a  proof  that  dynamic  influences  were  absent. 

How  an  Imaginary  Static  Society  is  Created.  —  If 
we  wish  to  discover  to  what  standard  the  values  of 
goods,  on  the  one  hand,  and  the  rewards  of  labor  and 
capital,  on  the  other,  continually  tend  to  conform, 
we  must  create  an  imaginary  society  in  which  popula- 
tion neither  increases  nor  diminislies,  in  which  capital 
is  fixed  in  amount,  in  which  the  nuethod  of  making 
goods  docs  not  change,  in  which  the  mode  of  organiz- 
ing industry  continues  without  alteration,  and  in 
which  the  wants  of  consumers  never  vary  in  number, 
in  kind,  or  in  intensity. 

Cof^ts  of  Production  in  a  Static  State.  —  We  have 
said  that  in  such  a  static  state  the  prices  of  different 


M^^^mms^^wsu^m 


WAGES 


133 


products  are  just  high  enough  to  cover  the  wages  and 
interest  which  are  generally  paid.    There  are  uniform 
or  aU-around  rates  of  pay  for  labor  and  for  capital 
and  every  man  who  hires  workmen  or  gets  loans  from' 
a  bank  has  to  pay  them.    In  the  real  v.-orld,  full  as 
It  IS  of  disturbances,  and  given  over  as  it  is  to  forces 
of  change  and  progress,  we  find  that  values,  wages 
and  interest  are  in  general  surprisingly  near  to  these 
standards.     In  a  particular  business  products  may 
for  a  time  sell  for  enough  to  afford  a  large  surplus 
above  prevailing  wages  and  interest,  and  business  as 
a  whole  may   for  a  time,  yield  some  such  surplus; 
but  in  the  absence  of  monopolistic  privileges  no  one 
busine.3  yields  a  large  surplus  for  a  long  time,  and 
still  lesa  does  business  as  a  whole  do  so,  though  profits 
may  alvvays  be  found  somewhere  within  the  system'. 
Jhejxnal  Productivity  of  Labor.  ~  If  we  assume 
that  the  capital  of  society  is  a  fixed  amount,  we  may 
perform  an  imaginary  experiment  which  will  show 
how  much  labor  really  produces,     ^\e  may  set  men 
at  work,  a  few  at  a  time,  until  they  are  all  employed 
and  we  may  measure  the  product  of  each  of  the  de- 
tachments     We  should  make  the  different  sections 
of  the  working  force  as  similar  to  each  other  as  it  is 
possible  to  make  them  and  call  each  section  a  unit 
of  labor.     If  there  were  ten  such  divisions  and  if  the 
quaivtity  of  capital  were  sufficient  to  equip  them  all 
on  the  scale  on  which  laborers  are  at  present  actually 
oquipped,  It  IS  clear  that  this  amount  of  capital,  when 
It  was  lavished  on  one  single  section,  must  have  sup- 
pi.od  ,t  with  instruments  of  production  in   nearlv 
inconceivable    profusion.     What    we    should    tn-dav 
rt-gard  as  a  tair  complement  of  capital  for  a  t!  ---sand 
men  would  nearly  glut  the  wants  of  a  hundrec,    and 


r 


Ml 


*R 


(: 

\ 


I  1 


?  ! 


1  , 


134 


ESSENTIALS   OF   ECONOMIC  THEORY 


yet  it  is  thinkable  that  it  should  take  such  forms  that 
they  would  be  able  to  use  it. 

Productivity  of  the  First  Unit  of  Labor.  —  We  will 
set  at  work  one  "  ^ron  which  we  have  called  one  unit 
of  labor  and  will  put  into  the  hands  of  its  members 
the  whole  capital  which  is  designed  ultimately  to 
equip  the  ten  sections.  It  is  very  clear  that  the 
forms  that  this  capital  will  take  cannot  be  the  same 
that  it  will  have  to  take  when  the  entire  working 
force  is  using  it.  Indeed,  we  shall  have  to  tax  our 
ingenuity  to  devise  ways  in  which  one  unit  of  labor 
can  utilize  the  capital  that  will  ultimately  be  used 
by  ten.  The  tools  and  machines  will  have  to  be  few 
in  number  but  very  costly  and  perfect.  We  shall  have 
to  resort  to  every  device  that  will  make  a  machine 
nearly  automatic  and  cause  it  to  exact  very  little 
attention  from  the  person  who  tends  it.  The  build- 
ings will  have  to  be  of  the  most  substantial  and  du- 
rable kind.  We  shall  have  to  spend  money  without 
stint  wherever  the  spending  of  it  will  make  labor  more 
productive  than  it  would  otherwise  be.  If  we  do 
this,  however,  the  product  of  the  labor  and  its  equip- 
ment will  be  a  very  large  one.  The  industry  will 
succeed  in  turning  out  indefinitely  more  goods  than  a 
modern  industry  actually  does,  and  the  reason  for  it 
will  be  that  the  workmen  have  capital  placed  in  their 
hands  in  unparalleled  profusion. 

The  Product  of  the  Second  Unit  of  Labor.  —  We  will 
now  introduce  a  second  unit  of  labor,  by  doubling 
the  number  of  workers,  without  changing  the  amount 
of  the  capital.  We  must,  of  course,  change  the  forms 
of  the  capital,  or  it  cannot  be  advantageously  used  by 
the  larger  working  force.  The  buildings  will  have  to 
be  larger,  and  if  tlioy  are  to  be  erected  with  about  the 


^^m:^^!mL 


WAGES 


135 


same  amount  of  capital  as  was  formerly  ur?d,  they 
must  be  built  in  a  cheaper  way.  Tools  of  every  sort 
must  be  more  numerous,  and  this  larger  number  of 
tools,  if  it  is  to  represent  the  same  investment  of 
capital  that  the  former  number  embodied,  must  also 
be  smipler  and  cheaper.  The  whole  equipment  of 
capital  goods  will  have  to  undergo  a  complete  trans- 
mutation; but  the  essential  thing  is  that  the  amount 
of  the  capital  should  not  be  changed. 

A   Provisimal  Mode  of  Measuring   Capital.  —  In 
measuring  the  amount  of  the  capital  we  are  obliged 
to  use  a  unit  of  cost,  and  in  the  illustration  we  have 
assumed  that  the  cost  can  be  measured  in  dollars. 
The  productive  fund  consisted  at  the  outset  of  a  cer- 
tain number  of  dollars  invested  in  productive  opera- 
tions.    This  is  only  a  provisional  mode  of  measuring 
It.    The  money  spent  really  represents  sacrifice  in- 
curred, and  we  shall  find  that  the  only  kind  of  sacrifice 
that  is  available  for  measuring  the  cost  of  goods  of  any 
kind  is  that  which  is  incurred  by  labor.     Ultimate 
measurements  of  wealth  in  all  its  forms  have  to  be 
made  m  terms  of  labor.    Such  measurements  have 
presented  difficulties,  and  the  attempt  to  make  them 
has  led  to  serious  fallacies.     We  shall  see,  in  due 
time,  how  these  fallacies  can  be  avoided. 

The  Law  of  Diminishing  Productivity.  ~  Vnder 
these  conditions  the  second  unit  of  labor  will  add 
something  to  the  amount  that  was  produced  bv  the 
first  unit,  but  it  will  not  cause  the  product  to  bi^come 
double  what  it  was.  It  couhl  not  do  that  unless  the 
capital  also  were  doubled.  Each  unit  of  labor  is  now 
coopprating  with  one  half  of  the  original  capital,  and 
the  total  product  is  less  than  it  would  have  been  if  the 
new  labor,  on  entering  the  field,  had  brought  with  it 


•'  !=   i 


!f^ 


i  i 


J. 

3i> 


I    i 

km- 


136 


ESSENTIALS   OF    ECONOMIC   THEORY 


II 


as  full  an  equipment  of  productive  instruments  as 
was  possessed  by  the  labor  that  preceded  it.  Adding 
to  the  industry  a  second  unit  of  labor  without  adding 
anything  to  the  capital  makes  the  total  product 
somewhat  larger,  but  falls  short  of  doubling  it.  If  we 
credit  to  this  second  unit  of  labor  what  it  adds  to  the 
product  that  was  created  before  it  came  into  the  field, 
we  shall  find  that  it  is  a  certain  positive  amount,  but 
obviously  less  than  the  total  product  which  was  real- 
ized by  *^";  first  uni'«  and  all  the  capital.  It  is  even 
less  than  :.  half  of  the  product  of  the  two  units  using 
all  the  capital.  Perhaps  the  first  unit  of  labor,  when 
it  used  all  the  capital,  created  ten  units  of  product ; 
while  the  two  units  of  labor,  using  this  same  original 
amount  of  capital,  produce  sixteen  units  of  product. 
The  clear  addition  to  the  original  product  which  is 
caused  by  the  added  labor  of  the  second  squad  of 
workmen  is  only  six  units,  while  a  half  of  the  total 
product  after  the  addition  to  the  labor  has  been  made 
is  eight.  This  figure  represents  the  amount  we  may 
attribute  to  one  unit  of  labor  and  a  half  of  the  total 
capital,  while  six  re{)resent  what  is  causally  due  to  one 
unit  of  bare  labor  only.  With  all  the  capital  and  one 
unit  of  labor  we  get  ten  units  of  product,  while  the 
addition  of  one  unit  of  bare  labor  brings  the  total 
amount  up  to  sixteen.  Six  units  find  the  cause  of 
their  existence  in  the  presence  of  the  second  unit  of 
labor,  and  the  second  unit  therefore  shows,  as  com- 
pared with  the  first,  a  diminished  productivity. 

Product  of  the  Third  Unit  of  Labor.  —  Wc  will  now 
introduce  a  third  unit  of  labor,  leaving  the  amount 
of  capital  still  unchanged,  but  again  altering  the  fomis 
of  it  so  as  to  adapt  them  to  the  needs  of  a  still  larger 
working  force.    We  will  make  the  buildings  larger 


WAGES 


137 


and  therefore,  of  necessity,  cheaper  in  their  forms  and 
materials.  We  will  make  the  tools  and  machines  more 
numerous  and  simple,  and  will  do  everything  that  is 
necessary  in  order  to  make  the  fixed  amount  of  capital 

—  the  fund  amounting  to  a  given  number  of "  dollars  " 

—  embody  itself  in  the  number  and  the  kinds  of  capi- 
tal goods  that  are  requisite  in  order  to  supply  three 
times  the  original  number  of  workmen.  The  third 
unit  of  lalior  now  adds  something  to  the  product  real- 
ized by  the  first  two,  but  the  addition  is  smaller  than 
it  was  in  the  case  of  the  second  unit. 

Products  of  a  Series  of  Units  of  Labor.  —  If  we  con- 
tinue this  process  till  we  have  ten  units  of  labor,  em- 
ploying the  same  amount  of  capital  as  was  formerly 
used  by  one,  we  shall  find  that  each  unit  as  it  begins 
to  work  ailds  less  to  the  previous  product  than  did 
the  unit  which  preceded  it,  and  that  the  tenth  unit 
adds  the  least  of  all. 

Care  must  be  taken  not  to  confound  the  addition 
that  is  made  to  the  product  in  consequence  of  the 
additional  working  force  with  the  amount  which, 
after  the  enlargement  of  the  force,  is  created  by  the 
hust  unit  of  labor  and  its  pro  rata  share  of  the  capital. 
When  the  tenth  unit  of  labor  is  working,  it  is  using  a 
tenth  of  the  capital  and  the  two  together  create  a 
tenth  of  the  product.  This  is  more  than  the  amount 
which  is  added  to  the  product  by  the  advent  of  the 
tenth  unit  of  labor.  That  addition  is  merely  the  dif- 
ference between  the  product  of  all  the  capital  and  nine 
units  of  labor  and  that  of  all  the  capital  and  ten  units 
of  labor.  This  extra  product  can  be  attributed  en- 
tirely to  the  increment  nf  hhnr. 

It  is  also  carefully  to  be  noted  that  when  the  units 
are  all  working  together,  their  products  are  equal  and 


il 


I 


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i     1 


r  1 


r 

1 

f 

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k 

I'l 

i        i 

i 

138 


ESSENTIALS   OF   ECONOMIC   THEORY 


the  particular  one  which  happened  to  arrive  last  is 
not  less  productive  than  the  others.    Each  one  of 
them  IS  now  less  productive  than  each  one  of  the  force 
of  nine  was  under  the  earlier  conditions.    In  like  man- 
ner each  unit  of  the  nine  is  less  productive  than  was 
in  the  still  earlier  period,  each  unit  of  the  force  of  eight' 
At  any  one  period,  all  units  produce  the  same  amount 
At  any  one  period,  then,  what  any  one  unit  of  labor 
produces  by  the  aid  of  its  pro  rata  share  of  the  capital 
IS  a  larger  amount  than  what  each  can  be  regarded  as 
producing  by  itself.    Though  one  of  ton  units  creates, 
with  the  aid  of  a  tenth  of  the  capital,  a  tenth  of  the 
product,  of  itself  it  creates  less ;  for  we  can  onl  v  regard 
as  Its  own  product  what  it  adds  to  the  product  that 
was  creating  before  it  arrived  on  the  scene     It  is 
the  bare  product  of  a  unit  of  labor  alone  that  we  are 
seeking  to  distinguish  from  other  elements  in  the 
general  output  of  the  industry,  and  that  consists  in 
the  difference  between  what  nine  units  of  labor  and 
all  the  capital  can  produce,  and  what  ten  units  of 
labor  and  all  the  capital  can  produce. 

We  will  consi.lor  the  amount  cf  capital  fixed  and 
let  the  amount  of  labor  increase  along  the  line  AE 
and  we  will  lot  the  product  of  successive  units  of  labor 
be  measured  by  the  vertical  distance  from  the  points 
on  the  line  AE  to  the  descending  curve  CD     AC  is 
the  product  of  the  first  unit  of  labor.     The  product 
of  later  units  is  measured  by  lines  to  the  right  of  AC 
and  parallel  with  it,  which  grow  shorter  as  the  num- 
ber of  units  incroasos.     ED  is  the  product  of  the  last 
unit.     In  each  case  we  impute  to  an  increment  of 
labor  whatever  amount  of  product  its  presence  adds 
to  that  which  was  created  before. 
Summary  of  Essential  Facts.  -  The  facts  that  are 


:?'!*. 


WAGES 


139 


to  be  remembered  then  are:    first,  that  the  capital 

remains  fixed  in  amount,  though  the  forms  of  it  change 

as  the  number  of  units  of  labor  increases ;  secondly, 

that  that  which  we  call  the  product  of  a  unit  of  labor 

is  what  that  unit,  coming  into  the  field  without  any 

capital,  can  add  to  the  product  of  the  labor  and  capital 

that  were  there  before; 

and    thirdly,    that    this 

specific  product  of  labor 

grows    smaller    as     the 

amount  of  labor   grows 

larger,      rendering     the 

product  of  the  last  unit 

the     smallest     of     all. 

When    the    tenth    and 

last     unit    is    working, 
each    one    of    the    nine 
earlier  units  is,  of  itself, 
producing  no  more  than  does  the  final  one,  though 
it  formerly  produced   more  because    of   the   larger 
quota  of  capital  with  which  it  was  formerly  supplied. 
The  Test  of  Final  Productivity.  —  There  are  now  at 
work  ten  units  of  capital  and  ten  of  labor,  and  we 
cannot  go  through  the  process  of  building  up  the  work- 
ing force  from  the  beginning.     How,  then,  do  we 
measure  the  true  product  of  a  single  unit  of  labor? 
By  withdrawing  that  unit,  letting  the  industry  go  on 
by  the  aid  of  all  the  capital  and  one  unit  of  labor  the 
less.    Whatever  one  of  the  ten  units  of  labor  we  take 
away  we  leave  only  nine  working.     If  the  forms  of 
the  capital  change  so  as  to  allow  the  nine  units  to  use 
it  advantageniisly,  the  product  will  not  he  reduced 
to  nine  tenths  of  its  former  size,  but  it  will  still  be 
reduced;  and  the  amount  of  the  diminution  measures 


t   ; 

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40 


ESSENTIALS    OF   ECONOMIC    THEORY 


the  amount  of  prodiiot  that  can  be  attributed  to  one 
unit  of  bare  labor.  Or  we  may  add  a  certain  num- 
ber of  workmen  to  a  social  force  already  at  work, 
making  no  change  in  the  amount  of  the  capital,  — 
though  changing  its  forms,  —  and  see  how  much 
additional  product  we  get.  That  also  is  a  test  of 
final  productivity.  It  givc^  the  same  measurement 
as  does  the  experiment  of  taking  away  the  little 
detachment  of  men  and  seeing  how  much  the  product 
shrinks.  By  either  process  we  measure  an  amount 
that  is  attributable  altogether  to  bare  labor  and  not 
to  capital. 

The  whole  area  BCD  in  the  diagram  is  an  amount 
of  product  that  is  attributable  to  capital  and  not  to 
labor.  It  represents  the  total  surplus  produced  by 
labor  and  capital  over  the  amount  that  can  be  traced 
to  the  labor  alone.  The  product  of  all  the  capital 
and  all  the  labor  minus  ten  times  the  product  of  a 
single  unit  of  labor  is  the  amount  that  is  attribu- 
table to  the  productive  fund  only. 

The  area  ABDE  represents  this  amount.  The  last 
unit  of  labor  creates  the  amount  DE&nd  the  number  of 
units  is  represented  by  the  amount  AE.  All  of  them 
are  now  equally  productive  and  what  all  create,  as 
apart  from  what  capital  creates,  is  thi^  Jiniount  ABDE. 

Only  the  Final  Part  of  this  Mode  of  gathering  a  Work- 
ing Force  practically  resorted  To.  —  The  process  of 
building  up  the  working  force  from  a  single  unit 
is  imaginary.  In  practical  life  we  sec  the  process 
only  in  its  final  stage.  Entrejyreneurs  do  continu- 
ally have  to  test  the  effect  of  making  their  work- 
ing forces  a  little  larger  or  a  little  smaller,  and  in 
so  doing  they  test  the  final  productivity  of  labor; 
and  this  is  all  that  is  necessary.    Tracing  the  process 


WAGKS 


141 


( - 


of  l)uuiiiiijr  ii|)  the  force  ot  lalH)r  unit  by  unit  reveals 
a  law  wliirsi  is  importaii!  namely,  that  of  the  diinin- 
ishing  I  Iff  .(I activity  of  single  units  of  labor  as  the 
number  of  units  increases.  If  we  crowd  tli-  world  full 
of  people  hut  do  not  proportionately  multijly  working 
appliances  of  every  kind,  we  shall  make  lal;  )r  poorer. 

Why  a  Detachment  of  Laborers  rather  than  (nu  ^!on 
is  treated  an  a  Unit  of  Labor.  —  In  making  u[)  the  force 
of  workers  we  might  have  treated  each  individual  as 
a  unit;  but  we  have  preferred  to  call  a  detachment 
a  unit  in  order  that  the  .synmietry  of  the  force  might 
be  preserved.  Mven  though  we  were  studying  only 
a  single  mill  it  would  have  its  departments,  and  it 
would  be  desirable  that,  when  we  enlarge  the  force 
of  men,  we  should  be  able  without  difficulty  to  give 
to  each  part  of  the  mill  its  fair  share  of  the  new 
laborers.  If  it  were  a  shoe  factory,  we  should  need 
to  add  lasters,  welters,  sewers  of  uppers,  etc.,  in  a 
certain  proportionate  way,  in  order  that  one  part  of 
the  mill  niight  not  get  ahead  of  another  and  pile  up 
unfinished  products  faster  than  they  could  be  taken 
and  completed. 

In  the  last  analysis  the  law  applies  to  the  industry 
of  all  society.  The  final  unit  in  the  case  consists  of 
shoemakers,  cotton  spiimers,  builders,  found.'-ymen, 
miners,  cultivatoi-s,  etc.,  and  of  men  of  all  subtrades 
included  in  the  general  callings.  As  the  composite 
detachments  come  into  the  field,  they  apportion  them- 
selves among  all  the  occupations  that  are  represented, 
and  that  too  in  nicely  adjusted  proportions.  We 
shall  see  in  due  time  how  this  adjustment  of  the  sev- 
eral shares  of  the  social  force  of  laborers  is  practically 
made. 

The  Law  of  Final  Productivity  Applicable  to  the 


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3 


ESSENTIALS   OF  ECONOMIC  THEORY 

Labor  of  Society.  —  The  law  of  final  productivity 
applies  to  every  mill,  shop,  or  mine  separately  con- 
sidered. If  its  capital  remains  fixed  in  amount, 
units  of  labor  produce  less  and  less  as  they  become 
more  numerous.  The  product  of  any  unit  at  any  one 
time  may  be  measured  by  taking  it  away  and  seeing 
how  much  the  output  of  the  establishment  is  reduced. 
The  law,  however,  applies  to  all  the  mills,  shops, 
mines,  etc.,  considered  as  a  social  complex  of  working 
establishments.  As  the  working  society  grows  larger 
without  growing  richer  in  the  aggregate,  the  power 
of  labor  to  produce  goods  of  all  kinds  grows  less.  At 
any  one  time  this  producing  power  is  measured  by  tak- 
ing away  from  every  working  establishment  a  number 
of  its  operatives  and  ascertaining  how  much  less  is  pro- 
duced after  the  withdrawal.  Such  a  test  on  the  social 
scale  is  never  made  consciously.  Each  employer  can 
test  in  an  approximate  way  the  effect  of  reducing  his 
own  force,  and  the  effect  of  gradually  enlarging  it,  and 
there  are  influences  at  work  which  result  in  enlarging 
one  industry  when  others  are  enlarged  and  in  causing 
the  final  productivity  of  labor  to  be  uniform  in  all.  A 
shoe  manufacturer  can  tell,  in  a  general  way,  how 
much  an  extra  man  or  two  will  be  worth  to  him.  It 
is  possible  to  ascertain  by  experience  about  what 
number  of  shoes  that  additional  labor  will,  in  a  year, 
add  to  the  output  of  the  shoe  factory  or  the  number 
of  tons  of  steel  it  will  add  to  the  present  annual  out- 
put of  a  furnace.  When  these  products  vary  in  the 
case  of  different  shops,  the  men  are  called  to  the  points 
where  the  apparent  additions  are  largest,  and  the 
constant  tendency  is  toward  a  level  of  productive 
power.  The  building  up  of  an  imaginary  force  from 
the  beginning  presents,  in  a  clear  and  emphatic  way, 


ir« 


WAGES 


143 


the  fact  that  the  specific  productivity  of  labor  grows 
less  as,  other  things  remaining  the  same,  workers 
become  more  numerous.  We  should  know  on  a 
priori  grounds  that  this  must  be  the  fact;  but  we 
can  verify  it  by  observation  and  statistical  inquiry. 
Where  men  are  numerous  and  land  and  tools  are 
scarce,  labor  is  comparatively  unproductive;  and  it 
is  highly  productive  where  land  and  tools  are  plenti- 
ful. There  is  no  doubt  that  crowding  the  world  full 
of  people,  without  providing  the  world  with  capital 
in  a  proportionate  way,  would  impoverish  everybody 
whose  income  depends  on  labor. 

The  Law  of  Wages.  —  Even  though  labor  creates 
the  amount  ABDE,  it 
is  noi.  vet  perfectly 
clear  that  it  will  be  able 
to  get  that  iiount. 
For  aught  we  ncv  know 
the  entrepreneur  may 
keep  some  of  it,  and  for 
aught  we  know  he  may 
keep  some  of  the  quan- 
tity BCD  which  is  dis- 
tinctly the  product  of 
capital.  Let  us  see  whether  he  can  in  reality  with- 
hold any  part  of  ABDE,  which  is  the  product  of 
labor. 

Wages  under  Perfect  Competition.  —  In  the  static 
state  that  we  have  assumed,  competition  works  with- 
out let  or  hindrance.  It  does  not  work  thus  in  the 
actual  world,  and  we  shall  in  due  time  take  account 
of  the  obstacles  it  encounters;  but  what  we  are  now 
studying  is  the  standards  to  which  such  onrnpetition 
as  there  is  —  and  it  is  in  reality  very  active  —  is 


y^ 


i     ftua 


144 


ESSENTIALS   OF   ECONOMIC  THEORY 


tending  to  make  wages  conform.  We  want  to  know 
what  would  happen  in  case  this  competition  encoun- 
tered no  hindrance  at  all.  This  would  require  that 
a  workman  should  be  able  to  set  employers  bidding 
against  each  other  for  his  services  just  as  actively 
as  an  employer  can  make  laborers  bid  against  each 
other  in  selling  their  services.  If.  this  were  the  case, 
every  unit  of  labor  could  get  what  it  produces,  no 
more  and  no  less.  Even  a  single  man,  offering  him- 
self to  one  employer  after  another,  would  virtually 
carry  in  his  hands  a  potential  product  for  sale.  His 
coming  to  any  man's  mill  would  mean  more  goods 
turned  out  in  a  year  by  the  mill ;  and  if  one  employer 
would  not  pay  him  for  them  at  their  market  vf  lue, 
another  one  would.  The  final  unit  of  social  labor 
can  get,  under  perfectly  free  competition,  the  value  of 
whatever  things  that  labor,  considered  apart  from 
capital,  brings  into  existence.  Moreover,  each  unit 
of  labor  by  itself  alone  now  produces,  as  we  have 
seen,  the  same  amount  of  commodity  as  the  final 
unit,  and  can  get  the  price  of  it.  Now  that  they  are 
all  working  tog<'ther  each  one  of  them  can  place  itself 
in  the  position  of  the  final  unit  by  leaving  its  present 
employment  and  offering  its  services  elsewhere. 

Wayen  regarded  as  Prices  of  Fractional  Products 
adjusted  by  Perfect  Comj)€tili(m.  —  Under  the  hypoth- 
esis of  perfect  competition,  as  the  term  has  been  used 
in  our  discussion,  the  venders  of  goods  can  get  their 
market  values.  These  values  are  fixed  by  the  final 
utility  law.  Free  competition  means,  then,  not  only 
that  any  average  laborer  who  offers  himself  for  hire 
virtually  carries  in  his  hands  a  potential  but  definit<^ 
product  for  sale,  but  ihat  he  may  confidently  offer  it 
at  the  price  that  is  fixed  by  its  final  utility.    Like 


WAGES 


145 


other  venders,  the  laborer  ran  get  the  true  value  of  his 
product  and  he  can  get  no  more.     In  an  ideally  per- 
fect society  organized  on  the  competitive  plan  a  man 
would  be  as  dependent  on  his  own  productive  power 
as  he  would  be  if  he  were  alone  in  a  wilderness.    His 
pay  would  Ix'  his  product;  but  that  would  be  indefi- 
nitely larger  than  it  could  be  in  a  wilderness  or  in  any 
primitive  state.    The  capital  of  other  men  and  the 
organization  that  they  maintain  enable  a  worker  to 
create  and  get  far  more  than  he  could  if  he  lived  alone, 
even  though,  like  Crusoe,  he  were  monarch  of  his 
whole  environment.    It  would  be  a  losing  bargain  for 
the  worker  to  surrender  the  product  of  mere  labor 
in  a  state  of  civilization  in  exchange  for  what  both 
labor  and  capital  create  in  a  state  of  savagery. 


iff 


SJ  1    s 


A 


CHAPTER  IX 


THE   LAW  OF  INTEREST 

The  product  of  th  ;  final  unit  of  labor  —  an  amount 
which  in  practice  is  measured  without  any  tracing  of 
the  previous  growth  of  the  working  force  —  sets  the 
standard  of  the  rate  of  wages.  We  have  now  to  see 
that  the  rate  of  interest  has  a  similar  basis;  and  yet 
it  is  worth  while  to  build  up,  wholly  in  imagination, 
a  fund  of  capital,  just  as  we  have  made  up  the  force 
of  laborers,  incror^ent  by  increment.  This  will  have 
the  incidental  effect  of  illustrating  another  way  in 
which  wages  may  be  determined. 

Interest  as  a  Residual  Amount.  —  The  area  BCD  in 
our  former  figure  represents  the  difference  between 
the  total  product  of  an  industry  and  the  wages  paid 
to  laborers.  If  there  is  no  net  profit  accruing  to  the 
entrepreneur,  this  area  must  represent  interest.  It  is 
what  is  left  for  the  capitalist  on  the  supposition  that 
he  and  the  laborer  together  get  all  that  there  is.  If 
the  goods  .«ell  for  what  they  cost,  this  must  be  the  fact, 
and  the  amount  represented  by  BCD  has  thus  to  go 
to  capital,  since,  by  a  rule  of  exclusion,  it  cannot  go 
to  the  entrepreneur  nor  to  the  laborer.  The  mill  and 
its  contents  earn  for  their  operator  notlung  but  simple 
interest  on  the  money  they  have  cost.  Paying  the 
laborers  discharges  the  first  claim  on  the  product,  and 
there  then  remains  only  enough  of  the  product  to  pay 
the  roni.'n??!ng  claifn,  that  of  capital. 

The  (question  still  remains  to  be  answered,  how  the 

146 


THE    LAW   OF   INTEREST 


147 


capitalist,  if  he  is  a  different  person  from  the  entre- 
preneur, or  operator  of  the  mill,  can  make  this  func- 
tionary pay  over  to  him  all  that  he  has  in  his  hands 
after  paying  the  wages  of  labor. 

Tlie    Importance    of  tlie   hesiduum. —  The    above 
reasoning  does  not  satisfactorily  show  what  influence 
the  capitalist  can  use  to  make  the  entrepreneur  pay 
over  to  him  the  entire  amount  of  the  residuum.     It 
shows  that  after  paying  wages  the  entrepreneur  will 
have  a  certain  amount  left,  but  it  is  not  thus  far  clear 
how  the  capitalist  can  get  it  from  him.    The  fact  that 
the  laborers  get  only  the  amount  represented   by 
ABDE  and  that  the  whole  amount  is  ACDE  does, 
how(!ver,  at  least  show  that  the  entrepr'eneur  has  the 
amount  BCD  left  in  his  hands,  and  that  he  is  able  to 
pay  this  amount  to  the  capitalist  if  by  any  appeal  to 
competition  the  capitalist  is  able  to  make  him  do  it. 
Interest  not  determined  Residiialty. —The  fact  is 
that  the  interest  on  capital  is  fixed  exactly  as  are  the 
wages  of  labor. 

We  will  let  another  figure  represent  the  entire  prod- 
uct of  the  same  amount  of  labijr  and  the  same  amount 
of  capital  that  were  represented  in  the  former  case. 
We  will  assume  that  there  is  at  the  outset  a  complete 
force  of  laborers,  and  that  no  men  are  added  to  it  or 
taken  from  it;  but  we  will  gradually  introduce  units 
of  capital  instead  of  units  of  labor  as  in  the  former 
case.  The  amount  of  capital  is  now  represented  by 
the  line  A'E'  and  the  product  of  the  first  unit  of  it 
by  the  lin."  A'C.  The  product  of  the  successive  units 
declines  along  the  curve  CD\  The  final  unit  ..f  cap- 
ital then  brings  into  existence  the  amount  of  wealth 
•  .presented  by  E'l)'.  As  every  other  unit  now  pro- 
duces the  same  amount,  the  capital  as  a  whole  creates 


t  ;■  V  V 


t 

i 
t    it 


:  i 

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'MSkJ^^m^ 


148 


ESSENTIALS   OF    ECONOMIC  THEORY 


I 


the  quantity  represented  by  A'B'iyE'  and  every 
unit  of  it  makes  its  own  separate  contribution  to  that 

amount.     In  this 
^  we    have    simply 

applied  to  capital 
and  its  earnings 
the  principle  we 
formerly  applied 
to  labor  and  its 
earnings. 

General  Form  of 
the  Law  of  Final 
Productivity. — 
This  principle  is 
the  law  of  final 
productivity,  one  of  those  universal  principles  which 
govern  economic  life  in  all  its  stages  of  evolution. 
Either  one  of  the  two  agents  of  industry,  used  in  in- 
creasing quantities  in  connection  with  a  fixed  amount 
of  the  other  agent,  is  subject  to  a  law  of  diminishing 
returns.  The  final  unit  of  the  increasing  agent  pro- 
duces less  than  did  the  earlier  units  in  the  series. 
This  does  not  mean  that  at  any  one  time  one  unit 
produces  less  than  another,  for  at  any  one  time  all  are 
equally  productive.  It  means  that  the  tenth  unit  pro- 
duces less  than  the  ninth  did  when  there  were  only 
nine  in  tise,  and  that  the  ninth  unit  formerly  pro- 
duced less  than  the  eighth  did  in  that  still  earlier 
stage  of  the  process  in  which  there  were  only  eight  in 
use,  etc.  If  the  productive  wealth  of  the  United 
States  were  only  five  hundred  dollars  per  capita  in- 
stead of  more  than  twice  that  amount,  interest  would 
be  higher  than  it  is,  heeausc;  the  productive  power  of 
every  dollar's  worth  of  capital  would  be  more  than 


THE    LAW   OP   INTEREST 


149 


the  productive  power  of  each  dollar's  worth  is  now; 
and,  on  the  other  hand,  if  we  continue  to  pile  up  for- 
tunes, great  and  small,  till  there  are  in  the  country 
two  thousand  dollars  for  every  man,  woman,  and 
child  of  the  population,  interest  will  fall,  because  the 
productive  power  of  a  dollar's  worth  will  become  less 
than  it  now  is. 

How  Compeh'lion  fixes  Interest.  —  We  can  now  see 
how  it  is  that  the  capitalist  can  make  the  entrepreneur 
pay  over  to  him  the  amount  left  in  his  hands  after 
paying  wages.  Every  unit  of  capital  that  any  one 
offers  for  hire  has  a  productive  power.  It  can  call 
into  existence  a  certain  amount  of  goods.  The  ofTer 
of  it  to  a.ny  entrepreneur  is  virtually  an  offer  of  a  fresh 
supply  of  the  kinds  of  goods  which  he  is  making  for 
sale.  Loaning  ten  thousand  dollars  to  a  woolen 
manufacturer  is  really  selling  him  the  amount  of  cloth 
that  ten  thousand  ilollars  put  into  his  equipment  will 
bring  into  existence.  Ix)aning  a  hundred  thousand 
dollars  to  the  manufacturer  of  steel,  so  as  to  enable 
him  in  some  way  to  p(Tfect  his  equipment,  is  virtually 
selling  him  the  number  of  additional  tons  of  steel, 
ingots,  or  rails  that  he  can  make  by  virtue  of  this 
accession  to  his  plant. 

The  Significance  cf  Free  Competition.  —  Now,  the 
tender  of  capital  may  be  made  to  any  entrepreneur 
in  a  particular  industry,  and  the  existence  of  free 
com;)etition  between  these  entrepreneurs  implies 
that  a  lender  of  capital  can  get  from  one  or  another 
of  them  the  whole  value  of  the  product  that  this 
capital  is  able  to  create.  A  unit  of  capital  in  the 
steel  business  can  produce  n  tons  of  stcci  in  a  year, 
and  if  one  employer  will  not  pay  the  price  of  n  tons 
for  the  loan  of  it,  another  will.    This,  indeed,  implies 


'  M 


v.; 

i 

I 


\ 

\   : 

i.  •' 


1  i,: 

I,,   i.  -. 


150 


ESSENTIALS   OF   ECONOMIC  THEORY 


Hit 


an  absolutely  froo  competition;  but  that  is  the  con- 
dition of  the  problem  we  have  first  to  solve.  When 
we  know  what  ideally  active  competition  will  do,  we 
can  measure  the  effects  of  the  obstructions  that,  in 
practice,  competition  actually  encounters. 

Competition  for  Capital  among  Different  Industrie.'^. 
—  The  capitali-st  can  invoke  the  aid  of  competition 
outside  of  the  limits  of  one  particular  business.  He 
may  offer  his  loan  to  steel  makers,  to  woolen  manu- 
facturers, cotton  spinners,  silk  weavers,  shoemakers, 
etc.  Within  each  one  of  these  industries  perfect 
competition  between  the  different  employers  will 
give  him  the  value  of  the  product  which,  in  that  busi- 
ness, his  capital  is  able  to  create.  If,  however,  what 
in  this  way  he  offers  to  men  in  one  occupation  is  worth 
more  than  what  he  offers  to  men  in  another  line, —  if 
capital  is  worth  more  to  steel  makers  than  it  is  to 
cotton  spinners,  —  he  will  find  a  market  for  his  capital 
in  the  former  indastry;  and  this  process  of  seeking 
out  the  employment  in  which  capital  is  the  more 
productive  and  there  bestowing  the  loans  of  capital, 
will  go  on  until  every  such  local  excess  of  productive 
power  is  removed  and  capital  can  produce  as  much 
wealth  in  one  business  as  it  can  in  another.  Every- 
where capital  will  then  be  both  producing  and  re- 
ceiving the  same  amount,  and  general  interest  will 
everywhere  be  determined  by  the  final  productivity 
principle  acting  all  through  ihv  business  world. 

When  Interest  as  Directly  Determined  equals  Interest 
as  Residually  Measured.  —  The  area  BCD  of  the  first 
figure  measures  what  the  entrepreneur  has  left  after 
p.aying  v^^gps.  This  amount  and  no  more  he  can  [>ay 
as  interest,  and  he  will  pay  it  if  he  has  to.  The  area 
A'B'D'E'  of  the  second  figure  represents   what   he 


THE    LAW   OF   INTEREST 


151 


must  pay  as  interest;  and  wo  can  now  see  that,  if 
competition  is  perfectly  free,  this  amount  equals  the 
amount  BCD  of  the  first  figure.  If,  af  t  paying 
wages,  there  is  any  more  left  in  the  entrepreneur's 
hands  than  competition  compels  him  to  pay  out  as 
interest,  he  is  realizing  a  net  profit;  he  is  selling  his 
goods  for  more  than  they  cost  him,  and  this,  as  we 
saw  at  the  outset,  is  a  condition  that  under  perfect 
competition  cannot  continue.  The  natural  price  of 
goods  is  the  cost  price.  If  the  market  price  of  any- 
thing is  in  excess  of  cost,  entrepreneurs  receive  a 
profit,  and  in  order  to  do  more  business  and  make  a 
larger  aggregate  of  such  profit  they  bring  new  labor 
and  capital  into  their  industry.  The  increased  output 
lowers  prices,  and  the  excess  of  gain  is  thus  taken  from 
the  entrepreneur.  If  BCD  is  smaller  than  A'B'D'E', 
the  entrepreneur  incurs  a  loss  and  will  curtail  his 
business  and  let  some  labor  and  capital  go  where 
they  can  produce  more. 

Taking  this  remainder  of  income  from  the  entre- 
preneur by  means  of  an  addition  to  ihv  output  of 
goods  and  a  reduction  of  the  price  of  them  does  not 
annihilate  the  income,  but  bestows  it  on  other  re- 
cipients ;  for  the  reduction  in  price  which  destroys  an 
employer's  profit  can  come  only  in  a  way  that  benefits 
consumers.  It  means  that  enlarged  production  of 
which  we  have  just  spoken,  which  scatters  more  goods 
throughout  the  community  and  insures  an  addition 
to  the  real  incomes  of  both  laborers  and  permanent 
investors. 

Effect  of  Perfect  Mobility  of  Labor  and  Capital.  — 
Perfect  mobility  of  lalwr  and  capital  insures  thaFthc 
residuum  in  the  entrepreneur's  hands  after  wages  are 
paid  shall  all  be  made  over  to  the  capitalist.    We 


1 


1^- 


f 

l 


I 


t    I 

i 


hi 
fe-i 


M 


152 


ESSENTIALS  OF   ECONOMIC  THEORY 


encounter  here  again  the  static  law  that,  with  com- 
petition working  without  let  or  hindrance,  the  entre- 
preneur as  such  can  keep  nothing  for  himself;  though 
if  he  is  also  a  worker  he  will  get  wages,  and  if  he  is 
also  a  capitalist  he  will  get  interest.  His  business 
will  pay  wages  on  all  kinds  of  labor,  including  that 
of  management,  and  interest  on  all  capital,  includ- 
ing his  own,  A  net  gain  above  all  this  it  will  not 
aflford,  and  whatever  the  entrepreneur  has  left  after 
paying  wages  he  will  have  to  use  in  paying  interest, 
and  vice  versa.  Laborers  and  owners  of  capital  have, 
as  it  were,  to  take  each  others'  leavings.  Such  is  the 
situation  in  an  ideally  static  condition,  though  we 
shall  see  how  it  is  changed  in  actual  and  progressive 
society. 

The  area  BCD  of  the  first  figure  is,  under  static 
conditions,  exactly  equal  to  the  area  A'B'D'E'  of 
the  second  figure,  because  ACDE  represents  the  whole 
product,  BCD  in  the  first  figure  represents  all  that 
is  left  of  it  after  wages,  measured  by  ABDE,  are  paid; 
and  we  know  by  evidence  both  theoretical  and  prac- 
tical that  the  capitalist,  whose  share  is  directly  ex- 
pressed by  A'B'D'E'  of  the  second  figure,  can  claim 
and  get  the  whole  of  this  amount. 

Wages  as  a  Residuum.  —  It  is  clear  that  the  same 
reasoning  applies  to  wages.  In  the  second  figure  they 
are  represented  as  a  residuum.  The  area  B'C'D' 
represents  what  he  entrepreneur  has  left  after  pay- 
ing interest,  and  nobody  can  get  this  amount  but  the 
wage  earner.  The  reason,  however,  why  the  wage 
earner  can  ge'^  it  is  that  free  competition  will  give  him 
the  amount  ABDE  of  the  first  figure,  and  this,  under 
perfectly  static  conditions,  must  equal  B'C'D'  of 
the  second.    Under  perfect  competition  the  entre- 


T,'iL:^m^£.k 


THE    LAW    OF    TNTKRE8T 


153 


preneur  rannot  have  any  ( f  the  amount  BVD'  left 
in  his  hands  after  meeting  the  claims  that  the  wage 
earner  makes  on  him.  On  the  other  hand,  he  mu.st 
have  enough  left  to  pay  interest,  since  otherwise  he 
would  be  incurring  a  loas.and  that  could  not  fail  to 
force  him  and  others  who  are  in  the  same  situation 
to  contract  their  operations  or  go  out  of  business.  If 
the  output  of  good.s  is  re(  iced,  either  by  the  retire- 
ment of  some  employers  or  the  curtailment  of  product 
by  all,  the  price  of  what  continues  to  b-  sold  will  be 
raised  to  the  point  at  which  wages  and  interest  can  be 
paid. 

Wages  and  Interest  both  adjusted  at  Social  Margins 
of  Production.  —  It  is  to  be  noted  that  wages  and 
interest  are  fixed  at  the  social  margin  of  production, 
which  means  that  they  equal  what  labor  and  capital 
respectively  can  protluce  by  adding  themselves  to  the 
forces  already  at  work  in  the  general  field  of  employ- 
ment. In  making  the  supposition  that,  owing  to 
some  disturbing  fact,  a  particular  entrejireneur  has 
not  enough  after  paying  wages  to  pay  interest,  we  as- 
sume that  the  rate  of  interest  is  fixed,  in  this  way,  in 
the  general  field  and  not  merely  in  his  establishment. 
If  B'CD'  were  larger  than  ABDE,  the  entrepreneur 
would  be  selling  goods  for  more  than  cost  and  realiz- 
ing a  net  profit,  which  he  cannot  do  in  a  static  state; 
but  a  pure  profit  is  not  only  possible  but  actual  in  a 
dynamic  state. 

In  actual  business  total  returns  represented  by 
ACDE  amount  to  more  than  the  sum  represented  by 
ABDE  (wages)  plus  A'B'D'E'  (interest).  There  are 
conditions  th.'it  in  practical  life  are  coratiruially  bring- 
ing this  to  pass  in  different  lines  of  business,  though 
not  in  all  of  them  at  once.    The  real  world  is  dynamic 


1 1 


i 

I  ; 


i   i 


!   ) 


iL^M 


154 


KSSENTIALS   OF   ECONOMIC   THEORY 


and  therefore  the  true  net  profit,  or  the  share  of  the 
entrepreneur  in  the  strict  sense  of  the  term,  is  a  positive 
quantity.  This  income  is  always  determined  rcsidu- 
aily.  It  is  a  remainder  and  nothing  else.  It  is  what 
is  left  when  wages  and  interest  are  paid  out  of  the 
general  pioduct.  To  the  entrepreneur  comes  the 
price  of  the  products  that  an  industry  creates.  Out 
of  this  he  pays  wages  and  interest,  and  very  often 
he  has  something  remaining  There  is  no  way  of 
determining  this  profit  except  as  a  remainder.  The 
return  from  the  sale  of  the  product  is  a  positive 
amount  fixed  by  the  final  utility  principle.  Wages 
and  interest  are  positive  amounts,  and  each  of  them 
is  fixed  by  the  final  productivity  principle.  Ti.f> 
difference  between  the  first  amount  and  the  sum  of  the 
two  others  is  profit,  and  it  is  never  determined  in  any 
other  way  than  by  subtracting  outgoes  from  a  gross 
income.  It  is  the  only  .share  in  distribution  that  is 
so  determined.  Entrepreneur's  profits  and  residual 
income  are  synonymous  terms.  In  the  static  state 
no  such  residual  income  exi.sts,  but  from  a  dynamic 
society  it  is  never  absent,  /jvery  entrepreneur  makes 
some  profits  or  losses,  and  in  society  as  a  whole  the 
profits  greatly  predominate. 

Summary  of  Facts  concerning  a  Static  Adjustment 
of  Wages.  —  We  know  then  that  in  any  industry 
wages  and  interest  absorb  the  whole  product,  because 
any  deviation  from  that  rule  in  a  particular  group  is 
corrected  in  the  way  above  mentioned.  Moreover, 
general  wages  and  interest,  as  determined  by  the  law 
of  final  productivity,  must  equal  those  incomes  when 
they  are  determined  residually.  The  area  of  the 
rectangular  portion  of  one  of  the  foregoing  figures 
;.iust  equal  the  area  of  the  three-sided  part  of  the 


THE   LAW   OF  INTERR8T 


155 


other.  The  question  arises  why  all  entreprenrttrs 
might  not  get  a  uniform  profit  at  once.  This  would 
not  lure  any  labor  or  capital  from  one  group  or  sub- 
group to  another.  If,  after  paying  wages  and  interest 
at  market  rates,  the  entrepreneurs  in  each  industry 
have  anything  left,  the  entire  labor  and  capital  are 
producing  more  than  they  get  and  there  is  an  induce- 
ment to  managers  and  capitalists  '  >  withdraw  froiri 
their  present  employers  and 
on  their  own  account.  Such  m  -  -f^^'  ti 
the  field,  drawing  marginal  ':■.'. lor  ,.ii  I 
from  the  cntrejn-enevrn  \v\  >  i.  !■'  nd' 
combining  them  in  a  n-  >  -  '  1  t;  k  >' 
them  produce  more  tha-.  '•  •  •  >  i.  t 
and  pocket  the  different  L"  :  l 
realized,  there  would  l)e  a  (.;in.  ■.:  .i.*  i 
prises,  since  luring  away  marg";  ■  ■  -'m 
bining  them  in  new  establixhrnei.t  :! 

profitable.  When  we  introduce  into 
dynamic  elements  we  shall  see  that  centralization, 
which  makes  shops  larger  instoad  of  snmller,  makes 
industries  more  productive,  and  that  what  happens 
when  net  profits  appear  is  more  often  the  enlarging 
of  one  establishment  than  the  creation  of  new  ones. 
Entrepreneurs  in  the  larg-^  estabiit-hi.ients  can  afford 
to  resist  the  effort  made  by  others  to  lure  away  any 
of  the  lalx)r  or  capital  which  they  are  employing,  and 
they  will  do  this  for  the  sake  of  retaining  their  profit.'- 
They  can  do  it  by  bidding  against  each  other,  in  cas 
.any  of  them  are  making  additions  *,o  their  milL  or 
shops,  and  also  by  bidding  against  any  new  employers 
who  may  api)ear.  Perfect  comf)etition  recjuircs  that 
this  bidding  for  labor  and  capital  shall  continue  up  to 
the  ^rofif -annihilating  point.    Here,  as  elsewhere  in 


entrejvcnctirft 
".      '  ,    'ring 

■I'."'  .  vay 
'  r-  nd 
''  "iU  i;..',ke 
t  ;  ,  'ly  \iwm 

'  ii  1.  II  were 
!;-  n  ■'.  enter- 
i'  ;'.!!'  com- 
1'  •d,.ays  Ix! 
the   problem 


u 


t  ■ 


156 


ESSENTIALS  OF  ECONOMIC  THEORY 


the  purely  static  part  of  the  discussion,  we  have  to 
make   assumptions  that   are   rigorously  theoretical 
and  put  out  of  viow  in  a  remorseless  way  disturbing 
elements  which  appear  in  real  life.    The  static  state 
requires  that  all  entrepreneurs  who  survive  the  sharp 
tests  of  competition  should  have  equally  productive 
establishments,  which  means  that  they  should  all  Ix; 
able  to  get  the  same  amount  of  product  from  a  given 
amount  of  labor  and  capital.    The  actual  fact  is  that 
differences  of  productive  power  still  survive.    There 
are  some  small  establislimetits  which,  within  the  httle 
spheres  iti  which  they  act,  are  as  fjroductivc  as  large 
ones;    but  there  are  also  some  which  are  struggling 
hopelessly  against  large  rivals  in  the  g(>neral  market 
and  are  destined  erelong  to  give  up  tlie  contest.     In 
other  words,  the  centralizing  and  leveling   effects  of 
competition  are  approximated  but  never  completely 
realized  in  actual  life. 

A  fact  that  it  is  well  to  note  is  that  the  test  of  final 
productivity  is  inaccurately  made  when  unduly  large 
amounts  of  lalx)r  and  capital  are  made  the  basis  of 
the  measurement.  Take  away,  for  in.stance,  a  (juarter 
of  the  working  force,  estimate  the  reduction  of  the 
product  which  this  withdrawal  occasions,  and  attribute 
this  loss  entirely  to  the  lalK)r  which  has  Ix^en  taken 
away,  and  you  estimate  it  too  highly.  With  .so  large 
a  .section  of  the  labor  withdrawn  the  capital  would 
work  at  a  disadvantage,  and  a  part  of  the  reduction 
of  the  product  would  be  due  to  this  fact.  If  we  .should 
take  away  all  the  lal)or,  the  capital  would  l)e  com- 
()letely  paralyzed,  and  the  product  would  iK'Come  nil. 
It  would  obviously  h'  inaccurate  to  .say  that  the  whole 
product  is  attributable  to  the  lalxir,  on  the  ground 
that  withdrawing  the  lal>or  annihilates  it  all.      With 


THE    LAW   OF   INTEREST 


157 


any  large  part  o'  'ho  labor  treated  as  a  single  unit,  the 
loss  of  product  oc  -asioned  by  a  witlidrawal  of  such  a 
unit  is  more  than  can  be  accurately  imputed  to  it  as 
its  specific  product.  The  smaller  Ihi'  increments  or 
units  are  made,  the  less  important  is  this  element  of 
inaccuracy,  and  it  becomes  a  wholly  negligible  (juantity 
when  they  become  very  small.  A  study  of  the  forms 
of  the  productivity  curves  will  show  thjit  if  we  take 
as  the  increment  of  lalx)r  useU  in  making  the  test  only 
a  tenth  of  the  whole  force,  we  exaggerate  the  product 
imputable  to  it  by  a  very  minute  fniction,  say  by 
less  than  a  one-hundre»lth  part;  and  if  w"  take  a 
hundretlth  of  the  labor  as  a  final  unit,  we  e.xaggerate 
the  product  that  is  .solely  attributable  to  it  by  an 
amount  so  minute  that  it  is  of  no  con.se(|uence  in 
practice  or  in  any  theory  that  tries  to  be  applicable 
to  practice. 

A  (juestion  may  be  rai.sed  as  to  whether  .?  are 
correct  in  .saying  that  the  entrepreneur  .s  y.xofit  is 
residual,  in  view  of  the  fact  that  the  entire  product  of 
a  bu-siness  is  at  the  mercy  of  the  management,  so  that 
a  bad  manager  may  reduce  it  or  a  good  one  may 
increa.se  it.  It  may  be  further  claimed  that  that 
part  of  the  management  of  a  business  which  consist.'^ 
in  making  the  most  far-reaching  decisions  carmot 
safely  be  intrasted  to  a  salaried  superintendent  or 
other  |)aid  official  and  mu.st  get  its  returns,  if  at  all, 
in  the  form  of  profits.  Even  in  this  ea.se  the  gains  are 
secured  by  nuiking  the  gross  return,  wliich  is  the 
minuend  in  the  case,  large,  leaving  the  two  subtra- 
hends, wages  and  interest,  unchanged,  jmd  thus 
creating  a  remainder  or  residuuni.  \Vc  shall  later 
see  to  what  extent  entrepreneurs  do  in  fact  create  the 
prolits  that  come  to  them. 


r 


n  I 


«3l 

1 


IB  :-m^'-&' 


158 


ESSENTIALS  OF   ECONOMIC  THEORY 


The  complete  static  conception  of  society  requires 
that  r'*  entrepreneur  ahould  Ix;  left  in  the  field  vho 
cannot  continue  indefinitely  to  hold  his  own  agriinst 
the  competition  of  his  rivals,  anil  this  requires  essen- 
tial equality  of  prtMluctive  power  on  the  part  of  all  of 
them.  It  is  not  necessary,  however,  that  all  should 
operate  u|)on  an  equal  scale  of  magnitude,  for  an 
interesting  feature  of  modern  life  is  the  need  of  many 
small  {)roduetive  establishments  that  cuter  to  local 
demands  and  to  wants  which  without  Ixing  local, 
call  for  only  a  few  articles  of  a  kind.  Hepiiii-s,  small 
orders,  and  peculiar  orders  are  executed  more  cheaply 
in  small  establishments,  and  they  survive  under  the 
very  rule  of  essential  ei|uality  of  pHwluctive  power 
which  static  conditions  re(|uire.  For  catering  to  tin- 
general  market  and  producing  staple  goods  the  large 
establishment  has  a  decisive  advantage,  and  this 
insures  the  centralization  which  is  the  marked  feature 
of  recent  industrial  life. 


^"^'r*^'^ 


I^KTV      T,- 


^^^^^■^:.^M    'T 


CHAPTER  X 


RENT 

The  Term  "Rent  "  as  Historically  Used.~T\w  word 
rent  has  a  striking  history.  The  science  of  politi- 
cal economy  first  took  shape  in  a  country  in  which 
direct  emf)loyers  of  labor  were  not,  as  a  rule,  the  own- 
ers of  much  hind.  Fanners,  merchants,  and  many 
manufacturers  hired  land  and  furnished  only  the 
auxiliary  cafjital  which  was  necessary  in  order  to 
utilize  it.  In  a  practical  way  the  earniiifis  of  land 
were  thus  separated  from  those  of  capital  in  other 
forms,  since  they  went  to  a  different  class  of  persons; 
and  in  the  thought  of  the  people  the  charges  made  for 
the  use  of  mere  ground  came  to  constitute  a  uni(iue 
kind  of  income.  If,  during  the  last  century,  the  land 
in  England  had  been  a  highly  mercantile  commodity, 
and  if  it  had  b<'en  the  common  practice  of  entreprefwum 
not  to  hire  it  but  to  buy  and  own  it,  as  they  bought  and 
owned  all  other  industrial  in.struments,  there  is  little 
probability  that  land  would  have  been  considered, 
either  in  practical  thought  or  in  science,  as  a  tiling 
to  be  as  broadly  distinguished  as  it  has  been  from 
all  other  cai)ital  goods.  A  business  man  would  have 
measured  his  jx-rmanent  fund  of  capital  in  pounds 
sterling  and  wouhl  have  included  in  the  amount  what- 
ever he  had  invested  in  land.  .A.s  in  Am(>rica  any 
representation  of  the  capital  of  a  corporation  inchuh'S 
the  sums  invested  in  every  pnxluctive  way,  and  this 
includes  the  value  of  all  Inii.l  that  the  company  holds, 

16tf 


V-r 


1(50 


KSSKNTIAL8  OF  ECONOMIC  THEORY 


SO  in  Kiif^land,  under  a  similar  system  of  conducting 
business,  unj'  statement  of  the  amount  of  a  particular 
business  capital  would  have  included  the  whole  of 
the  prtMluctive  wealth  embarkeil  in  the  enterprise; 
and  in  any  statement  of  the  forms  of  it  there  would 
have  a|)peared,  iM'sidrs  a  list  of  all  tools,  buildings, 
unfinished  floods,  and  the  like,  a  schedule  of  the 
prices  of  land  that  the  company  owned  and  used.  In 
"putting,'  capital  into  his  business"  a  man  might  buy 
land,  in  "withdrawing  his  capital"  he  might  sell  it; 
and  the  land  in  the  interim  would  l)e  the  obvious  em- 
Ixxliment  of  this  part  of  his  fund.  The  fact,  then, 
that  land  was  owneil  by  one  class  of  persons  and  let 
to  another  for  hire,  and  that  the  lessees  were  the 
entrepraienrs  or  users  of  it,  causnl  practical  thought 
and  speech  to  put  land  in  a  class  by  itself. 

The  Origin  of  the  Theory  of  Rent.  —  Scientific 
thought  powerfully  strengthened  this  tendency.  At 
a  very  early  date  a  fonnula  was  attained  for  measur- 
ing the  rent  of  land,  while  no  satisfactory  formula 
was,  then  or  for  a  long  time  afterward,  tliscovered  for 
measuring  the  amount  of  interest.  Men  contented 
themselves  with  saying  that  the  rate  of  interest  de- 
pends on  defnand  and  supply.  In  the  case  of  the 
rent  of  land  the  same  thing  might  have  Innm  said,  but 
here  such  a  statement  was  not  mentally  satisfying, 
and  investigators  tried  to  ascertain  why  demand  and 
sup[)ly  so  art  as  to  fix  the  income  that  land  yields  at 
a  certain  d«'tinable  aniount. 

Tlie  Traditional  Formula  for  Rent.  —  The  formula 
which  has  long  Im'cu  accepted  as  measuring  the  rent 
of  a  pie('<'  of  land,  though  it  bears  the  name  of  Ricardo, 
grew  into  shape  under  the  hands  of  several  earlier 
writers.     In  its  Ixst  form  of  statement  this  principle 


RENT 


161 


asserts  that  "the  rent  of  a  piece  of  land  is  the  prod- 
uct that  can  lie  realizeil  hy  applying  lalwr  and  capitai 
to  it,  minus  the  product  that  can  be  realized  by  ap- 
plying the  same  amount  of  labor  and  capital  to  land 
of  the  p(M)rest  grade  that  is  in  cultivation  at  all."  The 
(juantity  of  the  p<H)rest  land  must  be  left  indefinite, 
and  all  that  the  given  amount  of  lal>or  and  ca|)ital 
can  economically  utilize  must  b<'  left  at  their  disposal. 
It  would  not  do  to  say  that  the  rent  of  an  acre  of 
good  land  e«|uals  its  product  less  that  of  an  acre  of 
the  fMK)rest  land  in  cultivation  tilled  with  the  same 
ixpenditure  of  labor  and  capital.  If  we  should 
select  a  bit  of  wheat  lanti  in  England  tilled  at  a  large 
outlay  in  the  way  of  work,  fertilizers,  drains,  etc., 
and  try  the  experiment  of  putting  the  same  amount  of 
labor  and  capital  on  a  piece  of  e(|ual  size  in  the  remot- 
est |)art  of  Canada,  we  should  find  that,  so  far  from 
st'curing  wheat  enough  to  {)ay  the  bills  that  we  should 
incur  in  the  way  of  wages  and  interest,  we  should  not 
have  enough  to  help  us  greatly  in  the  defraying  of 
these  costs,  and  the  cultivation  of  this  piece  of  land 
would  b<'  a  losing  venture.  Instead  of  being  no-rent 
land,  yielding  merely  wages  and  interest  for  the  labor 
and  capital  u.sed  in  connection  with  it,  it  would  be 
minus-rent  land,  deducting  soniethir»g  from  the  earn- 
ings which  the  agents  combined  with  it  might  else- 
where secure.  In  order  to  utilize  such  land  at  all,  one 
must  till  it  in  what  is  termed  an  extensive  rather  thiiii 
an  intensive  way,  putting  a  small  amount  rather  than 
a  large  amount  of  work  and  exi>enditure  on  it.  Hy 
tilling  ten  acres  of  a  remote  and  sterile  farm  with  as 
much  lal)or  and  other  outlay  as  a  very  good  acre  of 
lurid  in  England  receives,  one  can  perhaps  get  enough 
to  pay  the  re(|uired  wages  and  interest.     In  general 


n 


I ' 


iLi^A^mM^mm^i.. 


'.i-vf;' 


\  l.4*> 


"Bm^^asL^j 


162 


ESSENTIALS  OP   ECONOMIC   THEORY 


no-rent  land  is  commonly  utilized  in  an  extensive 
way  and  very  good  land  in  an  intensive  way ;  and  in 
stating  the  old  formula  for  rent  we  need  to  be  careful 
to  make  it  mean  that  the  rent  of  the  good  piece  is  its 
total  product  less  the  product  that  can  be  had  by 
taking  from  the  good  piece  the  labor  and  capital  it 
now  absorbs  and  setting  them  at  work  on  a  piece  of 
the  poorest  land  which  is  enough  larger  than  the 
good  one  to  enable  us  to  secure  a  crop  which  will  be 
worth  just  the  amount  of  wages  and  interest  we  must 
pay.  The  larger  size  of  the  poor  piece  of  land  is  an 
essential  condition. 

Real  S'iqnijicance  of  Rent  Formula.— \i  will  be  seen 
that  this  formula  amounts  to  saying  that  the  rent  of 
land  is  what  the  land  itself  adds  to  the  marginal  prod- 
uct of  labor  and  capital.  Put  a  certain  amount  of 
labor  and  capital  on  a  piece  of  land  of  good  quality, 
and  you  get  a  certain  amount  of  product.  Withdraw 
the  land  from  the  combination,  and  you  force  the 
lal)or  and  capital  to  become  marginal  increments  of 
these  agents.  They  must  go  elsewhere  and  get  what 
th<  V  can.  One  alternative  that  is  open  to  them  is 
t  it  of  seeking  out  land  of  a  grade  so  poor  that  it 
I  not  b(x^n  previou.sly  utilized  and  doing  what  they 
to  get  a  product  out  of  it.    Whatever  they  can 

..ve  such  land  yield  is,  in  an  economic  sense,  wholly 
'heir  own  product.  There  is  an  indefinite  quantity 
of  this  kind  of  land  to  be  had,  and  vvlicrcver  labor  and 
capital  utilize  any  part  of  it,  they  can  have  all  that 
they  produce.  Now  if  we  subtract  what  they  there 
create  from  what  was  created  when  they  were  work- 
ing on  the  j^ood  land,  we  have  the  rent  of  that  land. 

Rent  as  a  Product  Imputable  to  Land.  —  The  differ- 
ence between  what  the  labor  and  capital  produce  at 


^^R'-l 


^■^'^Li^mi 


tig  Jt'-i  yT'WK^ 


RENT 


163 


the  margin  of  cultivation  of  land  and  what  they  can 
produce  on  good  land,  or  land  that  lies  within  the 
margin,  is  clearly  attributable  to  the  riualitics  of  the 
land  itself.  Given  A'  units  of  labor  and  1'  units  of 
capital,  combine  with  them  no  laud  except  such  as  is 
too  poor  to  have  been  previously  utilized,  and  you  j^et 
a  certain  product.  It  is  the  product  of  the  labor 
and  capital  using  something  which  is  free  to  any  one. 
Now  put  a  piece  of  good  land  into  the  cornljiiuition; 
to  the  A'  units  of  labor  and  }'  units  of  capital  add  a 
piece  of  productive  land  and  .sec  what  you  can  create. 
We  do  this  by  taking  these  units  of  labor  and  capital 
away  from  the  worthless  nuirginal  land  and  setting 
them  to  tilling  that  wiiich  is  of  the  better  quality. 
The  product  is  of  course  larger  than  they  got  before, 
and  the  ditTerence  measures  what  the  land  itself  adds 
to  the  output  of  the  other  agents  in  the  combination. 
The  true  conception  of  rent  is  that  of  the  specific 
addition  which  land  makes  to  the  product  of  other 
agents  u.sed  in  connection  with  it.  There  are  various 
ways  of  measuring  this  addition,  but  the  method  just 
used  will  at  iea.st  show  that  the  presence  of  the  good 
land  is  the  cause  of  the  excess  of  product  which  given 
amounts  of  labor  and  ca|)ital  secun;  over  what  they 
could  create  on  land  of  the  poorest  (juality. 

Rent  as  a  DijfercntUd  Product.  ~  h\  the  early 
statements  of  the  rent  hiw  it  was  not  said  that  the 
rent  of  a  piece  of  land  is  tlie  pnnluct  specifically 
attributable  to  it.  If  it  had  been,  vhe  chances  are 
large  that  a  nm<l)  brfiadei  and  nu.re  scientific  use 
of  the  rent  fonmila  woidd  have  re<nlt((|.  The  law  of 
rent,  as  it  was  actually  stated,  made  it  consist  of 
a  (lifTerential  amount.  It  was  what  a  given  amount 
of  labor  and  capital  would  produce  uiuler  one  set  of 


r  I 


'    ! 


164 


E88KNT1AL8   OF    ECONOMIC  THKORY 


conditions  minus  what  they  would  produce  under 
another.  Since  it  is  the  presence  or  the  absence 
of  the  pro<luctive  land  which  makes  the  only  dif- 
ference between  the  two  conditions,  rent,  even  as 
it  is  thus  defineii,  is  really  the  amount  of  product 
specifically  attributable  to  the  land.  It  is  what 
is  created  when  the  lantl  is  used  in  excess  of  what 
would  Ix'  created  if  it  were  not  used  and  if  the  co- 
operating agents  did  the  fjest  they  could  without  it. 
We  may  use,  as  the  most  general  fonnula  for  the 
rent  of  land,  the  contribution  which  land  itself 
makes  to  the  product  of  social   industry. 

If  we  use  the  same  method  in  measuring  the  rent 
of  land  which  we  used  in  measuring  the  wages  of 
labor  and  the  returns  of  capital,  we  shall  represent 
the  rent  of  a  given  piece  of  land  as  the  sum  of  a  series 
of  differential  amounts.  In  the  accompanying  figure 
the  vertical  Iwlts  bounded  by  lines  rising  from  the 
letters  A,  B,  C,  etc.,  represent  the  products  realized 
by  applying  successive  increments  of  labor  and 
capital  to  a  given  piece  of  land ;  and  the  horizontal 
lines  running  toward  the  left  from  A',  B',  C,  etc., 
separate  the  wages  and  interest  from  the  amounts 
that  are  successively  added  to  rent.  When  one 
composite  unit  of  labor  and  capital  is  working,  its 
{)roduct  and  its  pay  is  measured  by  the  Ix'lt  between 
the  line  AA'  and  the  line  NN\  A  second  com- 
posite unit  produce^  the  amount  represented  by 
the  area  between  A  A'  and  BB',  and  that  is  the 
amount  which  each  unit  .separately  considered  will 
produce  and  get  as  its  pay.  This  leaves  the  area 
between  the  horizontal  line  running  from  B'  and 
the  section  of  the  descending  curve  as  the  rent  of 
the  land.     A  third  unit  of  labor  and  capital  produces 


RENT 


165 


what  is  represented  by  the  area  between  Eff  and 
CC,  and  this  becomes  the  standard  of  pay  for  all 
units,  leaving  the  enlarged  area  above  the  hori- 
zontal line  at  C  as  rent.  In  the  end  there  .-^re  ten 
units  of  labor  and  capital.  Their  total  earnings 
are  expressed  by  the  area  of  the  rectangle  below 
the  horizontal  line  running  from  ./',  and  the  sum  of 
all  the  areas  above  that  line  is  rent. 

The  Intensive  Margin 
of  Cultivation.  —  The 
extensive  margin  of 
cultivation  is  the  land 
that  is  adjacent  to  an 
imaginary  boundary 
lino  separating  the 
grades  of  land  that 
are  good  enough  to 
be  used  from  those 
that  are  too  poor  to 
be  used.  There  is, 
however,  what  may  be  called  the  intensive  margin 
of  cultivation.  A  given  bit  of  land  is  said  to  be 
cultivated  more  and  more  intensively  when  more 
and  more  labor  and  capital  are  used  on  it.  Und 
is  subject  to  what  is  called  the  law  of  diminishing 
rot  urns. 

Law  of  Diminishinq  Returns.  — The  more  labor 
and  capital  you  employ  on  a  given  piece  of  land, 
the  less  you  will  get  as  a  product  for  each  unit  of 
those  agents.  What  the  last  unit  of  labor  adds  to 
the  antecedent  output  is  less  than  was  added  by 
any  of  the  other  units,  and  the  same  is  true  of  the 
last  unit  of  capital.  .As  we  continue  the  process 
of  enlarging  the  working  force  and  adding  to  the 


N     ABCDEFGHI. 


!  a 


;  * 


l:-1 


ESSENTIALS   OF   ECONOMIC  THEORY 


working  appliances,  we  reach  a  point  at  which  it 
is  better  to  cease  putting  new  men  with  their  equip- 
ment at  worlt  on  this  piece  of  land  and  to  sot  them 
working  on  a  bit  of  land  so  poor  that  it  was  not 
formerly  utilized  at  all.  We  may  asuunu  here  that 
what  a  man  needs,  in  the  way  of  auxiliary  capital, 
goes  with  him,  whether  he  joins  a  force  that  is  work- 
ing on  good  land  or  migrates  to  a  less  productive 
region.  He  will  go  if  it  will  pay  him  to  do  it.  In 
this  way  we  make  a  sort  of  dual  unit  of  lal)or  and 
capital  and  apply  a  series  of  such  units  to  land. 

(iround  Cajrital  and  Auxiliary  Capital  Distin- 
guished. —  Land  itself  is  a  component  part  of  the 
permanent  fund  of  productive  wealth  to  which  we 
have  given  the  generic  name  cajrital.  It  differs 
from  other  capital  goods  in  that  it  does  not  wear 
out  and  require  rcneuing.  Working  appliances, 
however,  as  they  wear  out  and  are  replaced,  con- 
stitute a  permanent  fund  of  auxiliary  capital,  and 
we  shall  apply  this  term  to  the  abidinj;  stock  of 
such  instruments  except  in  coimections  in  which 
the  adjective  is  not  needed,  because  it  is  clear  that 
the  land,  or  ground  capital,  cannot  be  referred  to. 
In  dynamic  studies  the  distinction  between  land 
and  auxiliary  capital  l)ecomes  very  important. 

IIoiv  the  Intensive  Margin  locates  the  Extensive 
One.  —  The  labor  and  the  auxiliary  capital  thut 
betake  themselves  to  new  land  of  the  inferior  quality 
represent  an  overflow  from  the  better  land.  As 
long  as  men  can  do  as  well  by  staying  where  th(\v 
are  as  they  can  by  migrating  to  new  regions,  where 
inferior  lands  are  to  be  had,  they  will  stay;  but 
when  they  incur  a  loss  by  staying,  th(>y  move.  What 
a  laborer  (m  '  create  by  securing  tlie  u^e  of  an  equi|)- 


RENT 


167 


mcnt  and  adding  himself  to  the  force  that  is  at 
work  on  some  good  farm,  can  be  approximately 
estimated;  and  if  there  is  somewhere  a  piece  of 
land  not  thus  far  used  to  which  he  can  remove, 
and  if,  by  going  to  work  upon  it,  he  can  create  any 
more  than  he  created  while  working  on  the  older 
farm  and  taking  his  products  as  his  pay,  he  will  till 
that  poor  piece.  But  neither  he  nor  any  one  vbo. 
will  till  a  piece  that  is  still  less  productive.  If  any 
one  were  to  set  himself  working  on  land  of  still  poorrr 
quality,  he  would  lo.se  and  not  gain  by  the  change, 
since  there  he  would  produce  even  l(>ss  than  he  can 
when  he  is  the  la.st  man  set  working  on  the  good 
piece. 

To  what  Extent  the  Movement  of  ImIot  and  that  of 
Capital  are  Interdependent.  —  The  early  statements 
of  the  law  of  rent  did  not  usually  define  the  intensive 
margin  of  cultivation  in  connection  with  labor  and 
capital  separately,  but  f^poke  of  these  two  agents 
as  employed  together  upon  land  \n  quantities  in- 
cioa.sing  up  to  a  limit  beyond  which  both  laljor  and 
capital  would  best  be  employe<l  elsewhere.  The 
supposition  that  lalwr  and  capital  go  thus  together 
from  one  grade  of  land  to  another  is  only  approx- 
imately accurate.  If  we  consider  one  man  and 
five  hundred  dollars'  worth  of  productive  wealth 
as  a  dual  unit  of  labor  and  capital,  and  add  such 
u'lits,  one  after  another,  to  the  forces  at  work  on 
a  tract  of  good  land,  we  shall  reach  a  point  at  which 
it  will  not  be  profitable  to  increase  the  amount  of 
Olio  of  the  agents,  while  it  will  still  b<»  |)rofitable  to 
increase  the  amount  of  tlie  other.  It  will  perhaps 
not  pay  to  use  any  more  capital,  but  it  may  still 
pay  to  add  to  the   number  of  workers.     On  land 


^^^^m^'^' 


'  \ 


M 


fTS 


m^:^<mn 


MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


1.0 


I.I 


150      ™^ 

■  63 

It  i^ 


2.5 


2.2 
2.0 

1.8 


1.25 


1.6 


A  ^PP^LIED  IIVMGE     Inc 

^Sr  !653   East    Mam    SIreel 

r-S  Rochester,    New    York  14609        USA 

ija  {7!6)   482  -  0300  -  Phone 

^B  CIS)   288  -  5989  -  Fo. 


168 


ESSENTIALS   OF    ECONOMIC   THEORY 


that  is  tilled  more  and  more  intensively,  labor  and 
capital  are  not  tied  together  in  fixed  proportions 
in  such  a  way  that,  when  there  is  more  of  one  of 
them   used,   there   is   proportionately   more   of  the 
other.    Moreover,  when  a  unit  of  one  of  them  aban- 
dons a  piece  of  land  and  goes  elsewhere,  there  is  no 
probability  that  exactly  one  unit  of  the  other  will 
do  the  same.    There  is,  indeed,  no  such  thing  as 
a  dual  unit  of  labor  and  capital  that  can  be  thought 
of  as  moving  to  and  fro  among  different  employ- 
ments till  it  finds  the  point  at  which,  as  a  dual  unit, 
it  can  create  its  largest  product.    These  two  agents 
so  locate  themselves  that  a  final  unit  of  each  one, 
separately  considered,  produces  as  much  where  it  is 
as  it  can  produce  anywhere  else. 

It  is,  however,  to  be  noted  that  the  amount  of 
labor  that  can  profitably  be  employed  on  a  piece 
of  land  grows  larger  the  more  capital  there  is  em- 
ployed in  connection  with  it.    An  acre  of  land  and 
a  thousand  dollars'  worth  of  auxiliary  funds  can 
enable  more  men  to  get  good  returns  than  can  an 
acre  combined  with  a  fund  of  five  hundred  dollars. 
Conversely,  the  more  men  there  are  working  on  the 
area,  the  more  auxiliary  capital  it  pays  to  use  there. 
If  there  are  five  men  working  on  a  small  field  it  may 
be  that  a  thousand  dollars  may  be  well  invested 
in  aiding  them,  while  with  only  one  man  it  would 
not  pay  to  use  so  large  an  amount.     The  capital 
and  the  labor,  as  it  were,  attract  each  other.    Ad- 
ditional   capital    attracts    further    labor,    and    vice 
versa,  till  a  condition  is  reached  in  which  neither 
of  them  can  so  well  be  used  on  that  particular  piece 
of  land  as  it  can  elsewhere.    Each  one  has  then 
been  used  on  this  area  up  to  its  own  intensive-mar- 


m^s^^s^^^^mk^m' 


rmmxrmm^^- 


RENT 


169 


ginal  limit.  So  also  when  one  of  these  agents  betakes 
itself  to  marginal  land,  it  attracts  the  other  agent 
thither.  When  there  are  ten  men  on  the  poorest 
piece  of  land  in  a  locality,  it  is  possible  to  make  a 
considerable  amount  of  capital  at  that  point  pay 
the  return  generally  prevailing,  whereas  only  a  small 
amount  would  pay  it  if  there  were  only  five  men 
working.  With  a  thousand  dollars  invested  on 
that  land  more  laborers  will  be  lured  thither  by  the 
prospect  of  fair  returns  than  would  be  lured  thither 
if  there  were  only  half  as  much  capital.  The  general 
apportionment  of  both  agents  tends  to  be  such 
that  a  unit  of  either  is  as  well  off  on  one  piece  of 
land  as  on  another,  and  each  is  as  well  off  at  the 
extensive  margin  of  cultivation  of  land  as  it  is  on 
the  intensive  margin. 

Labor  and  Capital  combined  in  Varying  Amounts. 
^The  amount  of  capltaf  tliat  is  combined  with 
a  unit  of  labor  is  not  often  the  same  on  good  land 
as  it  is  on  poor.  The  proportions  in  which  labor 
and  capital  will  be  combined  on  the  marginal  fiekl 
will  be  almost  certain  to  vary  from  those  in  which 
they  were  combined  in  the  better  field  from  which 
they  came.  It  may  be  that  they  leave  industries 
in  which  an  average  man  uses  an  equipment  worth 
a  thousand  dollars.  When  they  reach  the  margin 
of  cultivation,  capital  may  be  so  scarce  that  the 
thousand  dollars  will  not  stay  in  the  hands  of  the 
one  man  but  will  divide  itself  among  several. 

The  General  Imw  of  tfie  Extmdnn  of  the  Margin  of 
C?i/<ira/ton.  —  Sometimes,  when  labor  moves  to 
new  land  that  is  now  at  the  margin,  it  takes  its  new 
equipment  with  it;  but  such  land  is  not  always 
tilled  by  independent  settlers.    Employing  farmers 


A 


W  ( 


i   .  5 


!  I 

1-  ! 


hi . 


170 


ESSENTIALS   OF   ECONOMIC   THEORY 


may  set  men  working  on  it  and  pay  them  all  that 
they  produce;  and  the  farmers  may  furnish  the 
men  with  capital  of  their  own  or  borrow  capital 
for  them  to  use.  In  either  case  a  static  condition 
requires  the  equalizing  of  the  productivity  of  labor 
at  the  intensive  margin  with  that  of  labor  at  the 
extensive  margin;  and  it  requires  a  similar  leveling 
of  the  productivity  of  capital  at  the  two  margins. 
When  this  leveling  has  taken  place  in  both  cases, 
the  all-around  marginal  product  of  labor  fixes  the 
rate  of  wages,  and  that  of  capital  fixes  the  rate  of 
interest.  What  a  man  creates  on  the  gooc'  land 
and  with  the  adequate  capital,  or  on  poor  land 
with  proportionate  capital,  —  in  any  occupation  on 
land  of  either  grade,  —  determines  the  pay  that 
he  and  other  men  can  get.  It  constitutes  in  itself 
the  wages  of  labor.  In  so  far  as  the„  overflow  of 
labor  and  capital  into  any  one  limited  region  of 
marginal  land  is  concerned,  the  full  statement  is 
this:  that  the  margin  of  utilization  of  land  will 
be  extended  to  the  point  at  which  a  unit  of  labor, 
using  as  much  of  the  marginal  land  as  it  is  economical 
to  use,  and  such  amount  of  auxiliary  capital  as  is 
economical  to  combine  mth  this  unit  of  labor  and  the 
la7id  it  occupies,  will  create  a  product  equal  to  the 
wages  of  the  unit  of  labor  as  they  are  determi:ied  by 
the  product  it  created  when  it  was  employed  on  the 
good  land  and  in  connection  with  the  full  equipment 
of  auxiliary  capital. 

The  Rent  of  a  Fund  of  Capital.  —  We  saw  that  one 
unit  of  labor  employed  in  connection  with  a  given 
amount  of  capital  produces  more  than  does  a  second; 
that  the  second  produces  more  than  the  third ;  and 
that,  if  we  continue  to  supply  units  one  at  a  time, 


Wi^-yX^MA 


'^ 


^::,c^;2^1^^^^ 


!    I 


RENT 


171 


m 


the  last  unit  in  the  series  produces  the  least  of  all. 
Vv'ages  are  fixed  by  the  amount  that  one  unit  of 
labor  produces  when  the  working  force  is  complete, 
and  that  is  what  is  contributed  to  the  general  prod- 
uct by  the  unit  of  labor  which  comes  last  in  the 
imaginary  series  by  which  the  force  is  built  up. 
Owing  to  the  more  favorable  conditions  under  which, 
in  their  time,  the  earlier  units  worked,  they  were 
able  to  produce  surpluses  above  the  amount  pro- 
duced  by  the  last  one.    When  they  entered  the 
field   they   were   supplied   with   excessive   amounts 
of  capital.    The  first  one  had  the  whole  fund  co- 
operating with  it,  till  it  had  to  share  it  with  the 
second;  and  after  that  each  had  a  half  of  it  till  they 
had  to  share  evenly  with  a  third,  etc.     We  have 
seen   that   all   the   surj)luses   appearing  in  connec- 
tion with  the  earlier  units  arc  attributable  in  real- 
ity to  capital.    The  area  BCD  (page  139)  represents 
the  amount  by  which  the  presence  of  an  excess  of 
capital   increases  the  products  attributable  to  the 
earlier  units  of  labor.     It  represents  the  sum  of  all 
the  differences  between  the  products  of  the  earlier 
units  and  the  product  of  that  final  one  which  in  the 
end  sots  the  standard  of  productivity  of  labor.    It 
might  be  called  the  rent  of  the  fund  of  capital.    It 
is  composed   of  a  sum   of  differences  exactly  like 
those  which  constitute  the  rent  of  a  piece  of  land. 
The  Rent  of  a  Permanent  Force  of  Labor.  —  In  the 
figure  on  page  14S,  the  working  force  was  supposed 
to  be  fixed  in  amount,  the  capital   increasing  by 
increments,   or   as   some   earlier   economists   woukl 
have  said,  by  "dos"s"  along  the  line  A'E'.     The 
last  unit  of  capital  produces  the  .amnunt  D'E',  and 
all  the  cai)ital  protluccs  A'B'D'E',  while  products 


3 
i  ^-1 


>    i 


\4 


!    ,■ 


3'- 

I 


1 


I 


172 


KSSENTIALS   OF   ECONOMIC   THEORY 


of  the  earlier  units  of  capital,  as  they  come  suc- 
cessively into  the  field  and  are  used  by  an  exces- 
sively large  labor  force,  are  represented  by  the 
area  B'C'D'.  Here  tnis  area  represents  what  may 
be  called  the  rent  of  the  force  of  labor,  since  it  is 
a  sum  of  surpluses  that,  again,  are  entirely  akin  to 
those  that  constitute  the  rent  of  a  piece  of  land. 
A  Question  of  Nomenclature.  —  It  may  be  an  open 
question,  as  a  matter  of  mere  nomenclature,  whether 
these  surpluses  which  are  thus  traceable  to  a  per- 
manent fund  of  capital,  on  the  one  hand,  and  to 
a  permanent  force  of  labor,  on  the  other,  can  with 
advantage  be  called  rents.  In  this  treatise  we  do 
not  think  it  best  to  employ  that  nomenclature. 
What  is  not  uncertain  is  that  these  gains  are  meas- 
urable by  the  same  formula  that  measures  the  rent 
of  a  piece  of  land.  If  the  essential  thing  about 
rent  were  that  it  is  a  material  product  and  con- 
sists of  a  sum  of  differential  quantities,  these  incomes 
certainly  would  be  rents.  Popular  thought,  how- 
ever, attaches  another  meaning  to  this  term,  and 
we  therefore  limit  ourselves  to  saying  that  these 
differential  incomes  or  surplu.ses  may  be  determined 
in  amount  by  the  principle  of  rent.  They  can  be 
described  and  measured  exactly  as  the  Ricardians 
descnoed   the   income   of   landlords.* 

'  The  torm  rent  has  even  been  applied  to  surpluses  of  a 
rsychological  kind.  Certain  gains  that  men  get  consist  purely 
in  pk>a.sures  or  in  reduced  pains  or  sacrifices,  and  a  few  writers 
hav(!  applied  to  such  subjective  gains  the  term  rent.  If  a 
man  buys  a  barrel  of  flour  for  five  dolla.s  and  gets  out  of  it 
a  service  that  is  a  iiundred  times  as  great  as  he  could  get 
from  some  other  article  which  he  buys  for  the  same  amount, 
this  .surplus  tif  plc.-isurr  may  be  called,  b"  a  figure  of  speech, 
"consumers'  rent";     and  if  the  essence  of  rent  were  the  fact 


RENT 


173 


that  it  can  be  made  to  take  the  form  of  a  surplus  or  difference, 
the  name  would  be  well  cho.-eii,  iIicukIi  there  is  danger  that 
by  this  u«e  of  the  term  scienei;  may  divorce  itself  from  practical 
thought  and  life.     If  we  take  uU  the  barrels  of  flour  that  a 
man  uses  in  ten  years,  there  is  one  which  is  marginal,  because 
it  is  worth  to  the  man  only  enough  to  offset  the  sacrifice  he 
incurs  in   getting  it.     All   the   others   are   worth   more.     We 
can  arrange  them  in  a  scale  in  the  order  of  their  importance, 
the  most  necessary  ime  coming  first  and  the  le:ust  imix.rtaut 
one  last;    and  we  can  compare  the  service  which  each  one 
renders  with  that  rendered  by  the  hust,  and  measure  the  sur- 
plus of  good  which  each  one  does  to  the  u.ser.     There  is  here 
in  operation  a  law  of  diminishing  subjective  returns.     Early 
units   consumed    afford    mon;    pleasure    than    do    later   ones. 
There  results  a  series  of  surplus  gains,  and  the  sum  of  all  these 
surpluses  makes  a  total  of  net  betK^lit,  —  is  a  gain  that  is  not 
offset  by  a  compensatory  sacrifice.     The  last  barrel  of  flour 
on  the  list  is  worth  just  what  it  costs,  and  all  the  others  are 
worth   more.     They  give   the   consumer  a  surplus  of  satis- 
faction for  which  he  pays  nothing.     The  sum  of  the  excesses 
of  service  rendered  by  all  the  earlier  barrels  constitutes  what 
has  been  called  the  consumers'  rent,  realized  in  this  case  from 
the  entire  supply  of  flour  used  by  the  man.     In  the  manner 
in  which  it  is  conceived  and  measured  this  gain  has  a  kinship 
to  genuine  rent. 

This  surplus  is  an  effect  on  a  man  him.self.  It  is  not  any- 
thing outward  or  tangible.  It  exists  only  in  the  man's  sen- 
sations, and  is  as  far  as  possible  from  being  a  concrete  income 
in  material  form  traceable  to  some  particular  agent.  It  can 
be  measured  and  described  in  ways  that  arc  quite  akin  to 
the  manner  in  which  the  product  of  land  is  measured  and 
described.  Each  consists  of  the  sum  of  a  series  of  surpluses 
or  differential  amounts,  and  each,  moreover,  represents  a  gain 
which  is  not  offset  by  any  corresponding  subjective  cost. 
The  rent  of  land  must  be  paid  by  an  entrepreneur  and  is  a 
cost  in  the  same  sense  in  which  wages  and  interest  are  so; 
but  the  owner  of  the  land  did  not  create  it  by  personal  effort 
or  sacrifice. 

Analogies  between  the  product  of  land,  or  rent,  and  the 
special  gains  of  consumers  from  the  more  important  parts 
of  their  consumption  do  exist,  but  they  are  overbalanced 
by  essential  differences;  and  it  is  better  to  use  the  term  rent 
only  in  describing  the  specific  contribution  to  the  material  prod- 
uct of  industry  which  a  concrete  and  material  agent  makes. 


i  . 

' 

'      i 

■      \ 

'/i' 

■A 

Ik 

1 

i 

»  : 


I  'I 
1     , 


CHAPTER  XI 

LAND   AND  ARTIFICIAL   INSTRUMENTS 

One  may  hire  many  things  besides  land  ini  pay 
what  is  commonly  called  rent  for  them,  i  o  one 
would  think  of  calling  by  any  other  term  the  amount 
paid  for  the  use  of  a  building,  a  room  in  a  building, 
or  the  furniture  in  the  room.  All  these  things 
yield  rent  to  their  owners;  and  if  the  intuitions 
which  govern  the  common  use  of  terms  are  to  be 
trusted,  the  income  derived  from  such  things  and 
that  derived  from  land  have  some  essential  qualities 
in  common.  Every  such  income  is  paid  for  the  use 
of  some  concrate  instrument,  and  is  measured,  not 
by  a  percentage  on  the  value  of  the  instrument, 
but  by  a  lump  sum  — a  certain  number  of  dollars 
per  month  or  per  year. 

The  Mode  of  Calculating  the  Rent  of  Concrete  In- 
struments. —  Now  the  rent  of  such  instruments 
of  production,  whether  artificial  or  not,  can  be 
measured  in  exactly  the  same  way  in  which  the 
rent  of  land  is  measured.  We  saw  that  there  are 
two  margins  of  utilization  of  land,  an  extensive 
and  an  intensive  one,  and  that  the  product  of  labor 
and  capital  at  either  of  these  margins  may  be  used 
as  a  basis  for  computing  the  surpluses  which  con- 
stitute the  rent  of  the  land.  The  landlord  gets 
from  a  good  field  what  it  produces  minus  what  the 
labor  and  cajiital  that  are  used  on  this  field  would 
produce  if  they  were  used  on  the  poorest  land  in 

174 


^^pj^iSl^te^  -S^S^^ 


■^■^^ 


LAND   AND   ARTIFICIAL   INSTRUMENTS  175 

cultivation;    or,  what  is  the  same  thing,  he  gets 
from  the  field  what  it  produces  minus  what  this 
labor  and  capital  would  produce  if  they  were  set 
working   somewhere    on    the    intensive    margin    of 
cultivation.    Take  the  men  out  of  this  field,  add 
them  m  small  detachments  to  the  men  who  are 
already  cultivating  other  fields,  in  order  that  such 
fields  may  be  tilled  a  little  more  intensively,  pnd 
measure    the    product    which    the    laborers    create 
when  they  are  so  placed.    Withdraw  also  the  capital 
from  the  field,  add  it,  in  small  amounts,  to  the  capital 
that  IS  workmg  elsewhere,  and  measure  its  specific 
product.    The  sum  of  these  two  specific  produ-ts 
IS  the  same  amount  that  is  arrived  at  by  using  the 
former  standard.    This  labor  and  capital,  formerly 
used  on  the  good  field,  scattered  as  they  now  are 
among  the  users  of  other  good  land,  will  create  the 
same  amount  that  they  would  have  created  if  they 
had  been  employed  on  the  poorest  land  in  cultiva- 
tion    This  amount  is,  as  it  were,  what  they  produce 
by  their  own  unaided  power;   and  whatever  is  pro- 
duced  in  excess  of  this  amount  when  a  good  field 
comes  to  their  assistance  is  the  rent  of  that  field 
for  It  IS  the  contribution  which  the  field  makes  to 
the  joint  production.    Total  product  of  land,  labor 
and  auxiliary  capital  minus  the  product  created  by 
the  labor  and  auxiliary  capital   when  these  agents 
are  put  in  marginal  positions  equals  the  rent  of 
the  land. 

The  Rent  of  an  Instrument  measured  from  the 
Intensive  Margin. -We  can  measure  the  product 
of  any  instrument  in  this  way.  If  it  is  a  ship,  it 
takes  labor  to  sail  it  and  requires  a  considerable 
amount    of    auxiliary    capital.    We    must    fill    tlie 


'   I 


I 


i 

!    i 


I     u 


i 


in 


176 


ESSENTIALS   OF    ECONOMIC   THEORY 


bunkers  with  coal,  stock  the  steward's  department 
with  provisions,  furnish  and  Ught  the  staterooms 
and  the  saloons,  and  provide  cordage  and  a  wide 
variety  of  other  ship  stores.  All  this  lalx»r  and 
all  this  capital  we  could  take  out  of  the  ship  and  use 
elsewhere.  We  could  convert  them  into  marginal 
labor  and  capital.  We  could  divide  them  among 
the  owners  of  other  ships  where  they  would  Ix;  used 
in  a  way  that  would  make  these  other  ships  some- 
what more  efficient  and  cause  each  of  them  to  earn 
a  little  more  than  it  now  earns.  Whatever  the  la- 
bor and  capital  could,  in  this  way,  produce  furnishes 
the  basis  for  computing  the  rent  of  the  ship.  Sub- 
tract it  from  the  total  joint  product  of  labor,  capital, 
and  ship,  and  you  have  what  the  vessel  separately 
earns. 

The  Mode  of  Testing  the  Productive  Power  of  a 
Ship.  —  Put  the  labor  and  capital  into  the  ship 
and  set  it  doing  its  proper  work  of  carrying  freight 
and  passengers,  and  you  cause  a  certain  product 
to  be  created.  The  steamship  company  gets  an 
aggregate  amount  for  the  service  it  renders  by 
means  of  the  labor,  the  auxiliary  capital,  and  the 
ship.  A  certain  smaller  amount  would  be  realized 
if  the  labor  and  the  auxiliary  capital  were  taken 
out  of  the  ship,  distributed,  and  used  in  the  way  we 
have  just  described.  The  difference  between  the 
two  amounts  is  the  rent  of  the  ship,  or  its  particular 
contribution  to  the  general  product.  This  gives 
us  a  fornmla  for  computing  the  rent,  not  only  of 
land,  but  of  buildings,  tools,  machines,  vehicles, 
and  every  other  concrete  instrument  of  production. 
The  formula,  indeed,  is  so  peneral  that  it  enables 
us  to  compute  the  earnings  of  any  agent  whatso- 


LAND   AND   ARTIFICIAL    INSTRUMENTS 


177 


ever.  The  rent  of  any  such  agent  is  what  it  adds  to 
the  marginal  product  of  labor  and  capital  used  in 
connection  mth  it. 

No-rent  Instruments.  —  The  majority  of  instru- 
ments that  are  in  use  add  sontething  to  the  marginal 
product  of  the  labor  and  capital  used  in  connection 
with  them.  Some  arid  more  and  some  add  less, 
according  to  their  several  cjualities.  As  a  rule,  any 
tool  of  trade  produces  most  when  it  is  new  and  less 
and  less  as  it  grows  older.  In  the  end  it  is  discarded 
because  it  has  so  deteriorated  that  it  no  longer  adds 
anything  to  th  i  marginal  product  of  the  labor  and 
capital  that  are  used  in  connection  with  it.  A 
wagon  has  become  so  rickety  that  it  no  longer  pays 
to  furnish  a  horse,  a  harness,  and  a  driver  for  it. 
The  capital  and  labor  that  these  represent  would 
earn  as  much  if  they  were  detached  from  the  old 
vehicle  and  added  to  the  equipment  of  some  person 
who  has  a  stock  of  good  ones.  The  rent  of  this 
old  wagon  is  nothing.  As  in  the  case  of  the  poorest 
land  in  cultivation,  it  is  a  matter  of  indifference 
whether  certain  amounts  of  labor  and  capital  are 
used  in  connection  with  it,  or  whether  they  are  with- 
drawn and  employed  elsewhere.  This  poor  vehicle, 
like  the  poor  land,  may  be  used  without  positive 
loss;  but  if  it  is  so  used,  nobody  gets  any  income 
from  it.  It  has  no  power  to  enter  in  a  really  pro- 
ductive way  into  combination  with  labor  and  capi- 
tal, for  it  cannot  so  combine  with  them  as  to  add 
anything  to  those  marginal  products  which  the 
labor  and  capital  could  create  if  they  remained 
detached  from  it. 

The  Universality  of  the  Test  of  Rent.  —  This  test, 
whether  an  instrument  can  or  cannot  add  something 


I  t 


I    I 


k    \ 


If-i 


178 


KSSENTIALS   OF   ECONOMIC   THEORY 


ii 


l 


to  the  marginal  product  of  labor  and  capital,  may  be 
universally  us«l.     It  may  be  ai)pliod  to  everything 
that  is  made  as  an  aid  to  labor.    There  are  no-rent 
buildings,  locomotives,  cai.^,  tracks,  shijjs,  wagons, 
furnaces,  engines,  boilers,  and,  in  short,  instruments 
of  every  description  that  figure  in  production.     Com- 
bine any  one  of  them  with  labor  and  capital  and  see 
what  you  get  out  of  the  combination ;   then  take  the 
labor  and  capit.-d  away  and  see  what  they  will  pro- 
duce as  marginal  labor  and  cai)ital;  ai.d  the  difference 
between  the  two  amounts,  whatever  it  is,  is  the  rent 
of  the  instrument.     If  the  difference  is  nil,  the  instru- 
ment is  at  the  point  of  being  abandoned.' 

True  Capital  rather  than  Capital  Goods  moved  in 
Making  such  Tests  of  Productivity.  —  In  applying  these 
tests  with  scientific  accuracy  we  should  take  away 
the  true  capital  used  in  connection  with  a  rent-paying 
instrument  and  use  it  as  marginal  capital  elsewhere, 
rather  than  take  away  the  particular  concrete  thing 
in  which  that  capital  is  now  embodied.    In  the  case 
of  the  ship  the  accurate  test  is  made,  not  by  taking 
stores,  etc.,  bodily  out  of  it  and  putting  them  into  other 
ships,  but  by  letting  the  stores  first  earn  what  they 
can  where  they  are,  converting  the  earnings  into 
money,  and,  when  the  stores  are  completely  used  up, 
spending  the  money  to  procure  marginal  additions 
to  the  outfit  provided  for  the  other  ships. 

One  Difference  between  Land  and  Artificial  Capital 
Goods.  — In  the  case  of  land  a  particular  area  is 

'Whether  such  an  instrument  should  or  should  not  be 
called  a  capital  good  is  a  question  of  mere  nomenclature- 
but  m  this  treatise  we  consider  that  every  part  of  what  we 
term  capital  produces  an  income,  and  therefore  a  no-rent 
instrument  is  n,,t  a  capital-constitutinR  good  —  otherwise 
teiuied  u  cupiial  good. 


-.t._I-r.    i; 


LAND    AND   ARTIFICIAL    IN8TRUMKNT8  179 

marginal  or  no-rent  land,  and,  in  a  static  state,  it 
remains  so.  Any  particular  ship,  wagon,  engine,  or 
other  made  tool  he^'ins  its  career  as  a  rent  payer  and 
ends  it  as  a  no-rent  instrument.  If  we  watch  the 
whole  s  icial  stock  of  instruments  of  production,  we 
shall  see  the  no-rent  points  not  fixed  in  location,  but 
shifting  from  place  to  place.  Now  this  machine, 
now  another,  and  now  still  another  reaches  tlie  un- 
productive state  and  is  supplanted  by  instruments 
of  similar  kind  that  are  new  and  efficient. 

Original  Elements  in  the  Soil.  —  The  real  tlifference 
between  the  rent  of  a  piece  of  land  and  that  of  a 
building,  machine,  vehicle,  or  any  similar  instrument 
arises  from  the  fact  that  the  land  is  not  going  to  de- 
struction and  the  artificial  instrument  is.     There  are 
elements  in  what  is  commonly  called  land  that  wear 
out  as  do  the  tools  that  are  used  in  tilling  it,  but  these 
elements  are  not  land  in  the  economic  sense.     Land, 
as  Ricardo  long  ago  said,  consists  in  the  "original  and 
indestructible  powers  of  the  soil."     He  singles  out 
certain  constituent  elements  of  every  farm,  forest, 
building  site,  or  other  piece  of  what  is  called  land  in 
ordinary  usage,  and  gives  to  this  new  concept  the 
name  land  in  an  economic  sense.     The.se  so-called 
"powers"  are  original  elements  because  man  does 
not  make  them;    they  are  provided  altogether  by 
nature,  and  the  only  way  in  which  man  may  be  said 
to  impart  any  protluctive  power  to  them  is  by  putting 
them  into  combinations  in  which  they  can  produce. 
When  men  settle  ui)on  what  has  been  vacant  land, 
they  bring  +he  land  into  combination  with  labor,  and 
when  they  break  up  tlie  land  for  tillage  and  put  build- 
incs  on  it,  they  cnmhinc  it  with  artificial  capital.    By 
means  of  these  combinations  land  acquires  productive 


r 


)  I 


k  I 


180 


ESSENTIALS    OF    ECONOMIC   THEORY 


power;   but  physically  considered,  it  is  altogether  a 
natural  product. 

Indestructible  Elements  in  the  Soil.  —  Land  in  the 
economic  sense  is  indestructible  because  the  natural 
effect  of  use  is  not  to  destroy  it.     This  does  not  mean 
that  it  is  not  physically  possible  to  destroy  land  to 
the  extent  of  making  it  forever  impracticable  to  use  it 
in  the  ways  in   which  land  is  commonly  utilized. 
Nature  may  do  this  by  sinking  it  beneath  the  ocean, 
and  man  can,  if  he  will,  do  something  akin  to  this; 
but  he  does  not  naturally  destroy  what  is  truly  land 
in  the  using.     It  is  impossible  to  use  a  plow,  a  spade, 
or  a  reaping  machine  without  injuring  it  and,  in  the 
end,  A-earing  it  out.     It  is  also  impossible  to  draw  the 
nutritive  constituents  out  of  the  superficial  loam  a.id 
convert  them  into  crops  without  exhausting  the  supply 
of  these  sources  of  fertility  and  so  spoiling  that  which 
is  commonly  called  the  land,  though  it  is  not  so  in  the 
economic  sense.     What  is  really  land  in  this  sense  is 
not  affected.     Nitrates  and  phosphoric  acid  that  lie 
in  the  topmost  stratum  of  the  soil  are  among  the  de- 
structible  instranients   of  agriculture.     The   supply 
of  them  has  to  be  renewed,  if  cultivation  is  continued, 
and  they  are  therefore  in  the  class  with  the  plows, 
spades,  and  reaping  machines  which  also  wear  out. 
But  whatever  there  is  in  the  soil  that  suffers  no  deteri- 
oration from  any  amount  of  use  is  the  land  with  which 
political  economy  has  to  deal. 

The  Gross  and  the  Net  Rent  of  Land  Identical.  —  As 
land  does  not  wear  out  and  require  renewal,  all  that 
it  adds  to  the  products  of  the  labor  and  capital  that 
are  used  in  connection  with  it  may  be  taken  by  the 
landlord  as  an  income  without  reducing  the  amount 
of  his  property.  Whatever  luiid  produces  at  all  is 
a  net  addition  to  the  general  income  of  society. 


^nB5a:.*^;^--^>:s;ji'u.  .***■: 


•i.-Oc-^iW: 


LAND   AND   ARTIFICIAL    INSTRUMENTS 


181 


!  I 


'*if 


Net  Rent  of  Artificial  Instruments  Smaller  than  Gross 
Rent.  —  It  is  not  safe,  on  the  other  hand,  for  the 
owner  of  buildings,  tools,  or  live  stock  to  take  for  his 
own  consumption  all  that  these  produce.  If  he  were 
to  use  up  their  gross  produce  as  he  gets  it,  he  would 
find,  in  due  time,  that  a  considerable  part  of  his  prop- 
erty had  vanished.  Such  instruments  wear  out  and 
become  worthless,  and  if  no  part  of  what  they  produce 
is  set  aside  as  a  .sinking  fund  with  which  to  purchase 
other  instruments  to  take  their  p'  ees,  one  whole 
genus  of  capital  must  go  altogether  out  of  existence. 

Artificial  Instruments  Self -replacing.  —  What  act- 
ually happens  is  that  these  instruments  create 
enough  wealth  to  pay  for  their  own  successors,  and 
that,  too,  besides  paying  a  net  return,  which,  regarded 
in  one  way,  is  interest.  If  you  compute  the  whole 
product  of  one  of  these  instruments  by  the  Ilicardian 
formula  which  we  have  examined,  the  amount  of  it 
will  be  whatever  the  instrument,  during  its  entire 
career,  adds  to  the  product  of  the  labor  and  of  the 
capital  that  are  used  in  connection  with  it ;  and  that 
includes  the  fund  for  renewal  that  has  just  been 
described,  the  amount,  namely,  which  the  owners  must 
set  aside  for  repairing  the  in.strument  and  finally  pur- 
chasing another.  As  the  instrument  itself  provides 
this  sinking  fund,  it  may  be  said  to  create,  in  an  in- 
direct way,  its  own  successor.  The  ship  earns,  over 
and  above  the  net  income  which  is  interest  on  its  cost, 
enough  to  keep  itself  seaworthy  .so  long  as  it  sails  and, 
in  the  end,  to  build  another  ship.  The  locomotive, 
the  furnace,  the  loom,  the  sewing  machine,  the  print- 
ing press,  etc.,  all  pay  for  and  thus  indirectly  produce 
their  own  successors. 

The  Net  Rent  of  a  Permanent  Series  of  Similar 


1 


'  r 

I 

i 

I 


I  1 


182 


ESSENTIALS   OF   ECONOMIC   THEORY 


Instruments.  —  The  first  charge  on  the  product  of  any 
instrument  of  this  kind  is  the  amount  necessary  for 
replenishing  the  waste  of  it  and  for  providing  a  suc- 
cessor when  this  original  instrument  shall  have  been 
wholly  worn  out.     In  like  manner,  the  first  charge 
on  the  successor  is  providing  a  similar  fund,  and  so  on 
indefinitely.     A  part  of  the  productive  power  of  every 
one  in  an  endless  series  of  similar  instruments  is  de- 
voted to  thi.s  type  of  reproduction.    The  series  main- 
tains itself  and  yields  an  income  besides;   and  that 
remainder  of  its  gross  rent  which  is  loft  after  waste  of 
tissue  is  repaired  is  available  as  a  net  income  for  the 
owner.    This  net  remainder  constitutes  an  interest 
on  the  owner's  capital.     He  possesses  a  permanent 
fund  of  productive  nealth  embodied  in  the  endless 
series  of  these  perishable  instruments,  and  the  series 
taken  as  a  self-perpetuating  whole  yields  nothing  but 
this  interest.     Each  instrument,  separately  consid- 
ered, yields  interest  and  a  sinking  fund;  but  the  sink- 
ing fund  is  not  available  as  an  income,  since  it  must 
take  shape  as  another  instrument  which  serves  to 
keep  the  series  intact.     What  the  first  instrument 
creates  in  addition  to  the  sinking  fund  is  its  contri- 
bution to  interest,  and  what  each  instrument  creates 
above  what   is  required  for  virtual  self-perpetuation 
is  also  interest. 

Interest  and  Net  Rent  Identical.  —  We  may  there- 
fore reduce  interest  to  the  form  of  a  net  rent  by  cal- 
culating the  gross  rent  afforded  by  each  instrument 
in  such  a  series  and  by  ascertaining  how  much  of  this 
merely  repairs  waste  and  how  much  is  true  income. 
As  interest  is  usually  expressed  in  the  form  of  a  per- 
centage, we  may  reduce  tlic  net  rent  to  this  fui'iii  by 
comparing  it  with  the  cost  of  the  first  instrument. 


m^-' 


LAND   AND    ARTIFICIAL   INSTRUMENTS 


183 


which  is  the  amount  originally  invested.  The  series 
of  instruments  will  yield  a  net  return  every  year.  We 
can  compute  the  gross  return  of  each  instrument 
according  to  the  Ricardian  formula  for  measuring 
the  product  of  the  land.  It  will  diminish  from  year 
to  year  and  will  ultimately  vanish.  We  can  add  the 
several  annual  gross  earnings  of  the  instrument  during 
its  economic  lifetime  in  the  form  of  an  absolute  sum, 
which  is  the  total  rent  of  the  instrument.  From  this 
we  can  deduct  the  cost  of  replacing  this  worn-out 
capital  good,  and  the  remainder  will  be  the  net  rent 
of  the  instrument.  We  can,  in  a  like  way,  got  the 
net  rent  of  all  the  following  instruments  in  the  series 
for  a  long  period,  add  these  net  rents  together,  and  get 
the  true  net  earnings  of  the  scries  for  the  time  cov- 
ered by  the  calculation.  If  this  chances  to  be  ten 
years  we  may  compare  a  tenth  of  this  total,  or  the 
earnings  of  the  series  for  one  avera'^e  year,  with  the 
cost  of  the  first  instrument, — which  is  the  capital- 
ist's original  investment,  —  and  we  shall  thus  get 
the  fraction  which  represents  the  annual  rate  of 
interest  on  that  investment.  Perhaps  in  an  average 
year  the  series  hiif:  earned,  above  what  is  required  to 
repair  waste,  five  hundredths  of  what  the  first  in- 
strument cost.  That  is,  then,  the  rate  of  interest 
that  the  series  as  a  whole,  or  the  permanent  capital, 
is  yielding.  The  whole  procession  of  instruments  in 
which  permanent  capital  is  invested  creates  every 
year  this  fraction  of  its  own  value,  over  and  above  the 
sum  that  is  needed  to  offset  the  wear  and  tear  of  an 
average  year's  use.' 


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*:■  ■     ' 

1 

*  If  the  fund  for  replacing  a  costly  capital  good,  such  .ns 
a  ship  or  a  buildinp;,  were  allowed  to  accumulate  for  a  term 
of  years  before  being  spent,  the  part.s  of  it  remaining  on  hand 


184 


ESSENTIALS   OF   ECONOMIC  THEORY 


General  Interest  as  Rent.  —  If  y*.  compute  the  net 
income  of  all  tools,  machines,  and  other  like  things 
in  the  world,  add  the  amounts,  and  get  the  grand  total 
of  them  all,  you  have  the  entire  income  from  this 
part  of  the  capital  of  the  world  in  the  ffirm  of  net 
rent.  If  then  you  compute  the  value  of  ;ll  this  class 
of  instruments  and  see  how  large  a  part  or  this  value 
the  net  rent  is,  you  translate  this  total  rent  into  the 
form  of  interest,  and  therefore  net  rent  and  interest 
are  the  same  income  regarded  in  two  different  ways.' 

Stocks  of  Made  Instruments  graded  in  Qxialitij  as  is 
Land.  —  It  is  necessary  to  notice  the  fact  that  the 
permanent  series  of  tools,  buildings,  and  other  active 
capital  goods  shows  forever  the  same  gradations  of 
quality  that  are  found  in  the  case  of  land.  There 
are  always  to  he  found  some  instruments  which  are 
producing  a  large  amount  —  that  is,  they  arc  adding  a 
large  amount  to  the  product  of  the  labor  and  the  fur- 
ther capital  that  are  combined  with  them  in  produc- 
tion. A  given  amount  of  labor  and  capital  creates 
much  more  wealth  when  working  with  a  machine  of 
the  highest  class  than  it  would  if  distributed  in  mar- 
ginal positions ;  and  this  is  equivalent  to  saying  that 
such  an  instrument  is  itself  highly  productive.  Other 
instruments  are  to  be  found  which  are  creating  less, 
and  there  is  never  wanting  a  grade  of  no-rent  instru- 


for  so:  :,  ■-  would  earn  interest  for  their  owner,  and  in  his 
bookkic^.  „  tliis  would  figure  as  reducing  the  amount  he 
must  save  from  the  product  of  the  ship  or  the  building  in 
order  to  refilaeo  it.  This  does  not  affcrt  he  general  law  of 
self-replacement,  for  the  ship  or  building,  really  produces 
what  results  from  this  compounding 

'  in  computing  both  of  these  values  for  comparison  one 
should  use  a  labor-cost  standard,  and  we  shall  later  see  under 
what  limitations  such  a  standard  may  legitimately  be  used. 


LAND   AND    ARTIFICIAL   INSTRUMENTS 


185 


ments  which  are  adding  nothing  to  the  marginal 
product  of  the  other  agents.  It  would  be  as  well  for 
the  labor  that  used  them  if  it  should  drop  them  and 
add  itself  to  the  force  which  is  working  with  good  in- 
struments. Any  one  manufactured  instrument  begins 
its  career  as  a  maximum-rent  instrument  and  ends  it 
as  a  no-rent  one.  The  ship  is  at  its  best  when  it  starts 
on  its  first  voyage,  and  the  mill  is  at  its  best  in  the  first 
year  of  its  running.  Each  instrument  goes  gradually 
downward  in  the  scale  till  it  reaches  a  stage  in  which 
it  really  pro(Uices  nothing,  since  it  adds  nothing  to 
what  would  be  procUiced  without  it.  The  permanent 
series  of  instruments  never  thus  deteriorates.  All  the 
depreciation  of  particular  things  is  made  good  by  the 
repairing  and  the  replenishing  which  go  on.  In  the 
series  as  a  whole  there  are  forever  present  grade 
number  one,  grade  number  two,  grade  number  three, 
etc.,  exactly  as  in  the  case  of  land.  If  we  wish,  we 
can  reckon  the  income  that  is  to  be  gotten  from  each 
part  of  the  series  according  to  the  old-time  formula 
that  is  familiarly  used  in  the  case  of  land,  "What 
labor  and  capital  create  by  the  use  of  this  piece  of 
ground  in  excess  of  what  they  would  create  if  they 
were  applied  to  the  poorest  land  in  use."  For  a 
grade  of  land  read  a  grade  of  the  self-perpetuating 
series  of  artificial  instruments,  and  it  will  appear  that 
each  grade  above  the  poorest  yields,  with  the  labor 
and  capital  that  are  combined  with  it,  a  surplus  above 
what  this  labor  and  this  capital  could  create  if  they 
were  combined  with  the  poorest  grade  in  the  perma- 
nent series. 

Different  Modes  of  DeMroyirtfj  and  Replenishing 
Stocks  of  Capital  Goods  of  the  Two  General  Classes.  — 
The  process  of  keeping  up  a  stock  of  tools  of  trade 


i 

I 


n 


f 


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f  i 


186 


ESSENTIALS   OF   ECONOMIC  THEORY 


I 


is  unlike  the  process  of  keeping  intact  a  stock  of  ma- 
terials and  unfinished  goods,  because  the  modes  in 
which  the  two  kinds  of  capita!  goods  deteriorate  and 
perish  are  unlike. 

In  the  case  of  the  raw  materials  that  gradually 
ripen  into  articles  for  consumption  and  which  we  have 
called  passive  capital  goods,  the  waste  of  tissues  that 
takes  place  is  quite  unlike  that  which  takes  place  in  the 
case  of  active  capital  goods,  the  tools  and  implements 
that  are  used  in  the  process.  The  raw  nmterial 
acquires  value  through  the  whole  process,  and  in  the 
end  it  gives  itself,  with  all  its  acquired  value,  into  the 
hands  of  the  consumer.  In  a  static  state  such  goods 
embody  the  whole  income  of  society,  including  the 
products  of  all  labor  and  of  all  capital. 

A'"  The  series  of  ^'s  represents  the  process  of 
A"  creating  consumers'  goods  from  the  rawest 
A'  material.  The  A'"  as  taken  away  for  con- 
A  sumption  represents,  as  it  were,  the  wasting 
tissue  of  passive  capital  goods;  and  it  contains  in 
itself  the  wages  of  all  the  labor  in  this  series  of  sub- 
groups, the  interest  on  all  '^he  capital  there  used,  and, 
in  adilition  to  these,  the  sinking  fund  that  is  necessary 
in  order  to  keep  the  active  capital  intact.  Some  of 
the  articles  of  the  kind  A'"  will  have  to  be  given  over 
to  the  men  who  keep  the  tools,  buildings,  etc.,  in  repair 
ana  ri  place  them  when  they  are  worn  out.  The  whole 
force  of  the  industry  of  tliis  group  expends  itself 
simply  in  making  good  the  loss  that  the  withdrawal 
of  the  A'"  for  use  occasions.  It  floes,  in  short,  noth- 
ing but  replace  the  perpetually  wasting  tissue  of  the 
^4's.  All  industry,  oxrppt  that  of  thf  m.akors  nf  ac- 
tive instruments,  may  be  considered  in  the  light  of  an 
operation,  the  aim  of  which  is  to  keep  the  stock  of  pas- 


LAND    AND    ARTIFICIAL    INSTRUMENTS  187 

Bive  capital  goods  intact,  or,  what  is  the  same  thing, 
to  keep  the  fund  of  circulating  capital  undiminished! 
Whoever  puts  anything  into  this  fund  enables  it  to 
overflow  and  to  furnish  an  income  without  suffering 
any  diminution.    The  sole  purpose  of  such  capital  is 
to  overflow,  that  is,  to  suffer,  at  one  and  the  same 
time,  a  loss  and  a  replenishment  which  neutralizes 
the  loss.     It  exists  for  nothing  else  except  to  ripen 
mto  consumers'  wealth.    Nevertheless,  though  the 
ripened  ^'s  are  perpetually  consumed,  the  series  of 
^'s  is  abiding  capital,  is  entitled  to  its  share  of  inter- 
est, and  is  certain  to  get  it.    A  part  of  the  perpetual 
flow  of  ^""s  is  this  interest.    As  the  whole  income 
"f  the^society  consists  in  ^""s,  a  certain  number  of 
the^""s  that  are  withdrawn  for  consumption  go  to 
capitalists  as  interest  on  the  permanent  fund  which  is 
kept  in  existence  in  the  form  of  A,  A',  A",  and  A'".    A 
certain  other  part  of  the  outflow  of  ^""s  goes  also  to 
capitalists  as  interest  on  that  other  permanent  fund 
which  is  maintained  in  the  form  of  tools,  machines, 
and  buildings,  such  as  must  everywhere  be  used  in 
the  series.    A  third  part  of  the  flow  of  ^""s  is  wages 
of  labor  in  this  group;  and  a  final  portion  is  what  we 
have  called  the  sinking  fund,  the  amount   that  is 
given  over  as  an  income  to  the  producers  in  another 
group,  not  here  represented,  who  keep  the  stock  of 
buildings,  tools,  etc.,  intact.    These  four  withdrawals 
of  income  constitute  the  process  by  which  the  stock 
of  passive  goods  is  depleted,  and  the  grand  resultant 
of  all  industry  is  to  atone  for  that  depletion. 

Labor  and  the  Obtaining  of  its  Product,  in  Static 
Industry,  Synchronnxus.  —  One  function  of  the  prr- 
nianent  series  of  ^'s  is  to  enable  labor  evorvwhoro 
to  get  its  virtual  product  without  waiting,  and  that 


I  ; 

i  ) 
\  { 


I     I 


-^^fcr- 


188 


ESSENTIALS    OF    ECONOMIC   THEORY 


too  in  tho  form  in  which  it  needs  it  for  use.  The 
labor  that  converts  A"  into  A'"  supplies  the  waste 
of  tissue  that  takes  place  at  that  end  of  the  line  by 
withdrawal  of  an  A'".  The  labor  that  turns  A'  into 
A"  replaces  the  waste  that  takes  place  at  that  point 
when  an  earlier  A"  becomes  an  A'".  The  labor  at 
A'  replaces  the  waste  at  that  point,  and  that  at  A 
replaces  the  waste  at  still  another  point.  They  are 
all  at  work  keeping  the  stock  of  .4's  unimpaired,  and 
one  of  them  does  as  much  toward  keeping  up  the  per- 
petual flow  of  .4""s  as  any  other. 

If  we  pump  water  in  at  one  end  of  a  full  reservoir,  we 
instantly  cause  it  to  overflow  at  the  other  end;  and 
every  worker  in  such  a  series  as  wo  have  described 
may  be  thought  of  as  putting  something  into  the  per- 
manent reservoir  of  capital  and  so  causing  a  corre- 
sponding overflow.  He  gets  his  reward  day  by  day 
as  the  work  proceeds.  Wherever  a  laborer  may  be 
in  such  a  series,  his  work  creates  a  ripened  product 
as  it  goes  on.  He  has  not  to  wait  for  it.  His  work 
and  its  fruit  are  synchronous. 

Differences  between  Land  and  Made  Instruments 
Apparent  in  Dynamic  Conditions.  —  A  point  that  has 
great  theoretical  interest  is  the  nature  of  the  difference 
between  land  and  other  productive  instruments.  In 
a  static  society  the  difference  would  be  comparatively 
unimportant,  but  it  is  brought  into  prominence  by 
the  changes  which  constitute  a  dynamic  state.  The 
static  hypothesis  requires  that  capital  should  not 
increase  or  diminish  in  quantity,  and  that  it  should  not 
change  its  forms.  The  equipment  of  every  mill  and 
of  every  ship  is  kept  unimpaired  but  not  enlarged  or 
improved.  There  is  a  fixed  number  of  spindles  in  the 
cotton  mill,  of  lathes  in  the  machine  shop,  of  sewing 


ti 


LAND    AND    ARTIFICIAL   INSTRLMKNTS 


189 


machines  in  the  shoo  factory,  etc.,  and  thi.s  fact  re- 
moves the  most  strikinf?  difTerence  which,  in  a  dynamic 
society,  actually  distinj^uishes  land  from  other  things. 

Land,  in  the  ccononiic  sense,  <loes  not  increase  in 
quantity,  however  chanjjeful  and  progressive  a  s(.ci(>ty 
may  be.  The  chief  distinguishing  mark  of  land — 
that  of  being  fixed  in  amount  —  .separates  it  fn.m 
other  things  only  in  a  dynamic  state  and  lu-cause 
of  the  action  of  the  forces  which  produce  organic 
changes.  These  are  subjects  to  be  studied  in  the 
dynamic  division  of  economic  theory. 

A  DiHtingimhing  Mark  of  Land  which  appears  in  a 
Static  State  of  Itulustry.  —  In  a  static  state  there 
remains  this  tlilTerence  k'tween  a  piece  of  ground  and 
a  building,  a  tool,  or  any  other  instrument :  the  ground 
is  not  artificially  made  and  does  not  perish  in  the  using; 
v/hile  the  building  or  the  tool  or  other  appliance  Is 
so  made  and  does  so  perish.  It  nuist  in  wearing 
itself  out  create  in  the  indirect  way  which  we  have 
described  its  own  successor.  The  engine  must,  by 
a  part  of  its  product,  pay  the  nien  who  will  make 
another  engine  and  so  perjjetuate  the  series  of  engines. 
This  makes  it  necessary  for  the  owner  of  the  engine 
to  save  some  of  its  gross  rent  to  pay  for  depreciation 
and  renewal,  while  he  can  safely  use  the  whole  rent 
of  land. 

This  Mark  of  Distinction  not  AppHcnbJe  when  Land 
is  contrasted  with  a  Permanent  Stock  of  Capital  Goods. 
~  If  we  look,  not  at  one  particular  instrument,  but 
at  an  entire  series  of  them,  —  if  we  take  into  view,  not 
only  the  engine  which  is  now  driving  the  mill,  but  also 
the  one  that  will  succeed  it,  and  again  the  one  which 

will  succeed  that  second  engine,  and  so  on  forever, 

this  difference   between  land  and   the   artificial  in- 


if 


\r\ 


!       P 


190 


ESSENTIALS   OP    ECONOMIC   THEORY 


strumcntality  vanishes.  The  series  of  engines,  like 
land  itself,  yields  only  a  net  rent.  The  remainder  of 
its  gross  proiiuct  is  not  a  true  rent  at  all,  since  any 
one  of  the  engines  creating  it  has  to  consume  it  on 
itself  and  cannot  give  it  to  the  owner  as  an  income. 
This  remainder  pays  certain  men  for  keeping  the 
series  of  engines  intact,  and  what  is  given  to  them 
as  pay  for  their  services  camiot  accrue  to  any  one 
as  an  income  from  the  series  of  instruments  .so  main- 
tained. It  is  the  earnings  of  the  corps  of  mainten- 
ance created  by  their  own  labor  and  capital.  What 
the  series  of  engines  yields  over  and  above  what  it 
expends  in  maintaining  itself  it  gives  to  its  owners 
as  an  income.  This  is  their  net  return  and  they  can 
use  it  without  trenching  on  their  property.  The 
analogy  between  the  returns  from  land  and  those 
from  a  self-perpetuating  series  of  made  capital  goods 
is  in  this  particular  complete. 

The  Source  of  the  Fund  for  Repairs  and  Renewals.  — 
The  funrl  for  repairs  and  renewals  must,  of  course, 
like  the  net  income  itself,  be  furnished  by  instruments 
that  are  above;  the  no-rent  grade.  A  machine  will 
naturally  be  used  as  long  as  it  pays  anything  what- 
ever, and  during  the  latter  part  of  its  career  it  usually 
produces  less  than  mere  interest  on  its  cost.  So 
long  as  the  labor  and  the  auxiliary  capital  that  are 
combined  with  the  instrument  produce  by  its  aid  any 
more  than  they  would  produce  if  they  were  withdrawn 
from  it  and  added,  as  marginal  increments,  to  the 
labor  and  capital  that  are  working  in  connection  with 
good  instruments,  they  will  continue  to  use  the  ma- 
chine and  they  will  abandon  it  only  when  it  ceases  to 
pay  anj-thing  whatever.  Out  of  the  total  amount  it 
produces  before  reaching  this  point  of  abandonment 


LAND   AND    ARTIFICIAL    INSTRrMKNTS  191 

comes  the  amount  that  is  needed  as  an  offset  for  the 
cost  of  providing  a  new  machine. 

Incorrectness  of  a  Common  Statement  concerning 
Rent  and  Price.  —  Tliis  brings  into  view  a  striking 
fallacy  of  what  has  been  current  economic  theory.  It 
has  been  customary  to  claim  that  the  rent  of  land  "  is 
not  an  element  in  price,"  although  the  interest  on  capi- 
tal is  such  an  element.  The  rent  of  land  is  the  net 
product  of  land;  and  if  interest  be  kept  distinct  from 
it,  this  income  is  the  net  product  of  a  permanent  stock 
of  capital  goods.  The  relations  of  tluvse  two  com- 
ponent parts  of  the  constant  output  of  goods  to  the 
prices  of  the  goods  are  identical. 

Proof  of  the  Incorrectness  of  the  Current  Statement 
concerning  Rent  and  Price.  —  The  vague;  form  of  the 
current  statement  concerning  rent  and  price  is    re- 
sponsible  for  much   confusion  of  thought  on  that 
subject.     What  the  statem(>nt  would  mean  is 
the  price  of  wheat  is  not  affefted  by  the  great  l    .- 
tributions  to  the  supply  of  it  which  good  lands  are 
making.    These  contributions  are  the  rent  in  its  orig- 
inal form.     The  rent  of  wheat  land  is  wheat,  that  of 
cotton  land  is  cotton,  that  of  mill  sites  is  manufact- 
ured goods,  etc.    That  money  is  used  in  payments 
made  to  landlords  changes  nothing  that  is  essential. 
To  say  that  such  contributions  to  the  supply  of  par- 
ticular commodities  are  not  an  eiement  m  determin- 
ing the  prices  of  them,  would  be  as  unreasonable  as 
to  make  the  same  assertion  concerning  other  parts 
of  the  supply.     Quite  as  logically  might  it  be  asserted 
that  other  components  in  the  supply  do  not  affect 
prices  —  that  the  amount  of  wheat  which  is  attribu- 
table to  harvesting  machinery  or  the  amount  of  calico 
which  is  imputable  to  looms  has  no  influence  in  the 
market  values  of  these  articles. 


\ 


\-      : 


\       ":^^.i 


!  » 


tli 


•^'Si 


102 


ESSENTIALS   OF   ECONOMIC  THEORY 


Why  the  Produce  due  to  Good  Land  prevents  Prices 
from  greatly  limng.  —  If  the  use  of  good  wheat  land 
were  merely  discontinued,  the  supply  of  wheat  would 
of  course  Ix;  not  only  lessened,  but  reduced  almost 
to  nothing,  and  a  famine  price  would  at  once  result. 
If,  now,  an  attempt  were  made  to  make  good  the  short- 
age of  the  supply  of  this  cereal  by  tilling  lanils  which 
are  now  at  the  maigin  of  cultivation,  it  would  at  once 
appear  that  not  enough  of  such  land  exists  to  enable 
us  to  accomplish  the  purpose,  and  it  would  be  neces- 
sary to  push  the  margia  outward  and  till  poorer  and 
poorer  soils,  at  a  greatly  enlarging  cost.    We  should 
grub  out  worse  thickets,  drain  worse  swamps,  terrace 
more  discouraging  hillsides,  irrigate  more  remote  and 
barren  deserts,  etc.     All  this  would  mean  a  greater 
cost  of  production  of  wheat  and  a  higher  price  for  it 
in  the  market. 

It  would  also  mean  another  thing.    The  extending 
of  the  margin  of  cultivation  which  makes  it  include 
poorer  grades  of  hind  causes  that  part  of  the  area  now 
tilled  which  does  not  command  any  rent  to  yield  one. 
After  the  margin  should  have  been  greatly  extended 
and  finally  located  in  a  region  where  getting  anything 
out  of  the  soil  would  require  a  struggle,  it  would  ap- 
pear that  all  of  the  lands  newly  annexed  to  the  cul- 
tivated area  except  the  last  and  poorest  would  com- 
mand a  rent.     All  but  those  on  the  new  margin  would 
add  a  definite  ([uota  to  the  supply  of  wheat,  and  this 
contribution  would  be  their  rent.     Entering  into  the 
supply,  it  would  of  course  count  in  the  adjustment  of 
price. 

What  can  reasonably  ti  conceded  concerning  Rent 
and  Price.  —  There  is  another  possible  meaning  Oi 
the  phrase  "Rent  is  not  an  element  in  price";    and. 


LAND   AND   ARTIFICIAL    INSTRUMENTS 


193 


whether  it  was  clearl"  in  the  minds  of  those  early 
cconoini.sts  who  nmtle  the  assertion  or  not,  it  is  what 
their  argument  proves.  The  payment  of  rent  by 
tenants  to  landlords  has  no  effect  on  the  market 
value  of  the  produce.  "  Foo<l  would  not  becdUie 
cheaper,"  .says  Profes.sor  Fawcett,  "  even  if  land  were 
made  rent  free."  There  would  be  the  .same  need  of 
food  stuffs  as  iM'fore,  and  the  tillage  of  lands  would  be 
|)Ushed  to  the  present  nmrgin,  where  the  yield  is 
smallest.  The  co.st,  in  labor  and  capital,  of  that  mar- 
ginal part  of  the  supply  of  food  which  has  come  from 
these  poorest  lantls  would  continue  to  be  what  it  has 
been  heretofore.  The  farmers  would,  of  course,  get 
from  the  good  lands  the  same  surplus  that  they  get  at 
present ;  but  the  fact  that  laiul  had  been  made  rent 
free  would  erm..  them  to  keep  it.  This  surplus  is, 
of  course,  rent,  and  transferring  it  from  landlords  to 
tenants  does  not  affect  prices.  80  much  of  the  doc- 
trine formerly  current  is  true;  and  it  would  have  fore- 
stalled much  confused  thought  as  well  as  nmch  con- 
troversy if  the  statement  concerning  rent  and  price 
had  made  it  clear  that  any  rent  in  its  original  form  is 
an  element  in  the  supply  of  produce,  and  the  existence 
of  it  helps  to  determine  prices,  while  the  payments 
made  by  tenants  to  landlords  do  not  affect  them.  If 
these  payments  should  cease  and  the  tenants  should 
retain  the  rent,  prices  would  continue  to  be  what  they 
now  are.' 

'The  claim  1  at  rent  is  not  an  element  in  price  making 
might  be  made  i.  the  case  of  artificial  instruments  of  pro- 
duction as  reasonably  as  it  can  be  made  in  the  case  of  land. 
If  it  means  that  the  existenre  of  the  rent  has  no  effect  on  price, 
it  is  wholly  iriLunotl  in  both  cases.  Ttie  statement  may  be 
so  changed  as  to  tell  what  is  true  concerning  the  rent  of  land, 
and  it  will  then  also  tell  the  truth  about  the  product  of  the 


I 


^Ciife^^SiSB^^M^^j 


194 


ESSENTIALS   OP   ECONOMIC  THEORY 


I 


artificial  instruments,  which  is  interest  in  its  original  form. 
These  statements  may  be  made  in  parallel  columns,  and  one 
will  be  as  true  as  the  other  and  no  truer. 
A  needed  part  of  the  supply        A  needed  part  of  the  supply 


of  wheat  is  grown  on  marginal 
land. 

The  price  of  the  wheat  must 
pay  for  the  labor  and  capital 
used  on  this  land. 


The  price  of  wheat  raised  on 
good  land  i.s  the  same  as  that  of 
wheat  raised  on  the  marginal 
zone,  and  it  affords  a  surplus 
above  wages  and  interest  paid 
by  farmers  for  labor  and  caj)!- 
tal  used  in  the  tilling  of  the 
good  land. 


of  woolen  cloth  is  woven  on 
marginal  looms. 

The  price  of  the  cloth  must 
pay  for  the  labor  and  capital 
that,  in  the  woolen  manu- 
facture, are  combined  with 
these  looms. 

The  price  of  cloth  woven 
on  good  looms  is  the  same  as 
that  of  equally  good  cloth 
woven  on  marginal  ones,  and 
it  affords  a  net  surplus  above 
the  co.st  of  maintiiiiiing  the 
stock  of  looms  and  the  wages 
and  interest  paid  by  manu- 
facturers for  further  capital 
used  in  connection  with  the 
good  looms. 

The  existence  of  this  sur- 
plus in  its  original  form,  that 
of  cloth,  affects  the  supply 
and  the  price  of  this  product. 

The  fact  that  entrepre- 
neurs pay  capitalists  for  this 
surplus  has  no  effect  on  the 


The  existence  of  this  .sur- 
plus in  its  original  form,  that 
of  wheat,  affects  the  supply 
and  the  price  of  that  product. 

The  fact  th  it  farmers  pay 
landlords  for  this  surplus  has 
no  effect  on  the  price  of  wheat. 

price  of  cloth. 

Tlie  more  important  facts  concerning  rci.t  have  reference 
to  the  original  form  of  it,  namely,  a  product  in  kind.  What- 
ever constitutes  a  part  of  the  supply  <,f  anything  affects  the 
price  of  it.  The  surplus  afforded  by  good  looms  is  an  element 
in  the  supply  of  cloth,  and  that  afforded  by  good  land  is  an 
clement  in  the  supply  of  wheat.  They  make  "these  two  supplies 
larger  than  they  would  othcrwi.se  be,  and  of  course  they  are  of 
cardinal  inip(jrtance  in  di'terrnining  price.  The  rent  of  any- 
thing is  an  element  in  the  supply  of  some  kind  of  goods,  and 
the  a.mihilation  of  it  would  reduce  the  supply  and  raise  the 
price  of  product  in  which,  in  its  first  estate,  it  consists. 


■^^m?^^ 


CHAPTER  XII 


ECONOMIC   DYNAMICS 


The  Efficiency  of  Static  Forces  in  Dynamic  Societies. 
—  The  static  state  which  has  thus  far  been  kepi  in 
view  is  a  hypothetical  one,  for  there  is  no  actual  society 
which  is  not  changing  its  form  and  the  character  of  its 
activities.  Five  organic  changes,  which  we  shall  soon 
study,  are  going  on  in  every  economic  society;  and 
yet  the  striking  fact  is  that,  in  spite  of  this,  a  civilized 
society  usually  has,  at  each  particular  date,  a  shape 
that  conforms  in  some  degree  to  the  one  which,  under 
the  conditions  existing  at  that  date,  the  static  forces 
acting  alone  woukl  give  to  it.  It  is  even  true  that, 
as  long  as  competition  is  free,  the  most  active  societies 
conform  most  closely  to  their  static  models.  If  we 
could  check  the  five  radical  changes  that  are  going  on 
in  a  society  that  is  very  full  of  energy,  —  if,  as  it  were, 
we  coukl  stop  such  an  organism  midway  in  its  career 
of  rapid  growtli  and  let  it  lapse  into  a  stationary  con- 
dition, —  the  shape  that  it  would  take  would  be  not 
radically  unlike  the  one  which  it  had  when  we  inter- 
posed the  check  on  its  progress.  Taking  on  the  theo- 
retically static  form  would  not  strikingly  alter  its 
actual  shape.  The  actual  form  of  a  highly  dynamic 
society  hovers  relatively  near  to  its  static  model 
though  it  never  conforms  to  it.  In  the  case  of  slug- 
gish societies  this  would  not  be  true;  for  if  in  one  of 
them  we  stopped  the  forces  of  growth  and  waited  long 
enough  to  let  the  static  influences  produce  their  full 

195 


i 

•  I 
I  I 

i  1 

i 


I 


■aaf 


nM. 


196 


ESSENTIALS   OF   ECONOMIC   THEORY 


effects,  the  shape  to  which  they  would  bring  the  or- 
ganism would  be  very  different  from  the  one  which 
it  actually  had  when  its  slow  progress  was  brought  to 
a  stop.  Most  efficient  in  the  most  changeful  societies 
are  forces  which,  if  they  were  acting  by  themselves 
alone,  would  produce  a  changeless  state.  The  reasons 
for  this  will  later  appear. 

Differences  between  Static  Forms  of  Society  at 
Different  Dates.  —  A  highly  dynamic  condition,  then, 
is  one  in  which  the  economic  organism  changes  rapidly 
and  yet,  at  any  time  in  the  course  of  its  changes,  is 
relatively  near  to  a  certain  static  model.  It  is  clear, 
therefore,  that  it  cannot,  at  different  periods,  conform 
even  approximately  to  one  single  model.  If  the 
forces  of  change  which  in  1800  were  impelling  the 
industrial  society  of  America  to  a  forward  move- 
ment had  been  suppressed,  and  if  competition  had 
been  ideally  free  and  active,  that  society  would  before 
long  have  settled  into  the  shape  then  required  by  the 
forces  which,  in  the  preceding  chapters,  we  have  de- 
scribed. Some  labor  would  have  moved  from  certain 
occupations  to  others  and  gained  by  the  change ;  and 
this  movement  of  labor  would  have  ended  by  making 
the  productive  power  and  the  pay  of  a  unit  of  this 
agent  uniform  in  all  the  different  subgroups  of  the 
system.  Capital  would  have  so  apportioned  itself  as 
to  level  out  inequalities  in  its  earning  power.  The 
profits  of  entrepreneurs  would  have  been  equalized 
by  becoming  in  all  cases  nil,  and  the  best  available 
methods  of  production  would  everywhere  be  found 
surviving  and  bestowing  their  entire  fruits  on  laborers 
and  capitalists.  All  this  is  involved  in  saying  that 
the  static  model,  the  form  of  which  was  determined 
by  the  conditions  of  1800,  would  have  been  realized. 


ECONOivIIC   DYNAMICS 


197 


This  would  have  been  brought  about  by  suppressing  at 
that  date  the  forces  which  cause  organic  change  and 
by  giving  to  competition  a  perfectly  unobstructed 
field.  If  we  had  done  this  in  1900,  instead  of  at  the 
earlier  date,  economic  society  would,  in  a  like  way, 
have  conformed  to  the  shape  required  by  the  condi- 
tions of  1900 ;  and  this  would  have  been  very  dif- 
ferent from  the  shape  which  the  static  forces  would 
have  given  to  society  a  century  earlier.  There  is  an 
ideal  static  shape  for  every  period,  and  no  two  of 
these  static  shapes  are  alike. 

Differences  between  the  Actual  Shape  of  Society  and 
the  Static  One  at  Any  One  Time.  —  The  actual  shape 
of  society  at  any  one  time  is  not  the  static  model  of 
thfvt  time;  but  it  tends  to  conform  to  it,  and  in  a  very 
dynamic  society  is  more  nearly  like  it  than  it  would 
be  in  one  in  which  the  forces  of  change  are  less  active. 
With  all  the  transforming  influences  to  wh-  Amer- 
ican industrial  society  is  subject,  it  to-day  conforms 
more  closely  to  a  normal  form  than  do  the  more  con- 
servative societies  of  Europe  and  far  more  closely 
than  do  the  sluggish  societies  of  Asia.  A  viscous 
liquid  in  a  vessel  may  show  a  surface  that  is  far  from 
level ;  but  a  highly  fluit'  substance  will  come  nearly 
to  a  level,  even  though  \fe  shs'-.e  +he  vessel  containing 
it  vigorously  enough  to  create  vvaves  on  the  surface 
and  currnits  throughout  the  whole  mass.  Thib  is  a 
fair  representation  of  a  society  in  a  highly  dynamic 
condition.  Its  very  activities  tend  to  bring  it  nearer 
to  its  <5tatic  model  than  it  would  be  if  its  constituent 
materials  were  not  fluid  and  if  it  were  never  agitated. 
The  static  shape  itself,  though  it  is  never  completely 
copied  in  the  actual  shape  of  society,  is  for  scientific 
purposes  a  reality.    There  are  powerful  influences 


i    i 


i 


ir^A 


i     ,i  'V,  t 


I 

f 

i 


I- 


198 


ESSENTIALS  OP  ECONOMIC  THKORY 


tending  to  force  the  industrial  organization  at  every 
point  to  conform  to  it.  The  level  of  the  sea  is  a  real- 
ity, though  the  motion  of  the  waters  never  subsides 
sufficiently  to  make  their  surface  accurately  conform 
to  it.  As  vigorously  agitated,  the  water  shows  a 
surface  that  is  nearer  to  the  ideal  level  than  would  an 
ocean  of  mud,  tar,  or  other  sluggishly  flowing  stuff. 
The  winds  throw  up  waves  a  few  feet  high,  but  the 
fluidity  keeps  the  general  surface  surprisingly  level; 
and  so  civihzed  society,  made  as  it  is  of  fluid  material 
kept  in  vigorous  agitation,  finds,  as  it  were,  its  level 
easily.  If  in  any  year  we  could  and  should  stop  the 
dynamic  disturbances,  the  economic  society  would  as- 
sume the  static  shape  which  the  conditions  of  that 
year  called  for  as  readily  as  the  sea  would  find  .i 
normal  level  if  winds  and  tides  should  completely 
cease.  Static  influences  that  draw  society  forever 
toward  its  natural  form  are  always  fundamental,  and 
progress  has  no  tendency  to  suppress  them. 

Competition  a  Cause  of  Rapid  Changes  in  the  Stand- 
ard Shape  of  Society  and  of  a  QuicK  Conformity  of  the 
Actual  Shape  to  the  Standard  One.  —  The  competition 
which  is  active  enough  to  change  the  standard  shape 
of  society  rapidly  —  that,  for  example,  which  spurs  on 
mechanical  invention  and  causes  a  large  profit  to  be 
realized  in  a  particular  subgroup  —  has  also  the  effect 
of  calling  labor  and  capital  quickly  to  the  point  at 
which  the  profit  appears,  and,  in  the  absence  of  any 
monopoly,  reduces  this  profit  to  nil  and  restores,  in  so 
far  as  this  cause  of  disturbance  goes,  the  equilibrium 
of  the  groups.  Under  the  influence  of  active  compe- 
tition L  particular  group  frequently  undergoes  quick 
changes  which  call  for  more  labor  and  capital,  but  it 
gets  them  quickly;  and,  as  has  just  been  said,  the 


ECONOMIC    DYNAMICS 


199 


If    ■    •      Mil 

\ ',  '41 


standard  shape  of  a  society  which  is  in  this  highly 
fluid  condition  does  not  differ  so  much  from  the  actual 
shape  as  does  that  of  a  society  the  movements  of  which 
are  sluggish.  The  standard  shape  is  like  the  hare  that 
moves  quickly  and  irregularly ;  while  the  actual  shape 
is  like  the  pursuing  hound,  which  moves  equally 
quickly,  follows  closely  all  turns  of  the  course,  and,  if 
the  game  were  t'  stop  moving,  would  in  short  order 
close  on  it. 

The  Equalization  of  the  Productive  Power  of  Labor 
and  of  Capital  in  the  Different  Stibcfroups.  —  Wc 
have  seen  that  in  a  static  state  labor  and  capital  do 
not  move  from  subgroup  to  subgroup  in  the  system, 
and  that  this  absence  of  flow  in  a  fluid  body  is  not 
brought  about  by  monopoly  or  by  any  approach  to 
it.  That,  indeed,  would  obstruct  transfers  of  the 
producing  agents  from  point  to  point ;  but  monopoly 
is  a  thing  most  rigorously  excluded  by  tho  static 
hypothesis.  At  every  point  we  have  assumed  that 
the  power  to  move  is  absolute,  while  only  the  motive 
is  lacking.  The  equalization  of  the  productive  power 
of  labor  in  the  various  subgroups  pi-ecludes  the  mi- 
gration of  labor,  a:  id  a  like  equalization  precludes  a 
migration  of  capital. 

Equalization  of  Produdin  Powers  unthin  the  Sub- 
groups. —  Not  merely  must  each  unit  of  labor  or  of 
capital  be  able  to  create  as  much  wealth  in  one  sub- 
group as  in  another,  but  within  the  subgroup  — 
the  specific  industry  —  each  unit  must  be  able  to  cre- 
ate as  much  under  one  emi)loyer  within  the  industry 
as  under  another.  The  different  entrepreneurs  must 
compete  with  each  other  on  terms  of  ecjuality.and  no 
one  of  them  must  be  able  to  wrest  from  a  rival  any 
part  of  the  rival's  patronage.    So  long  as  one  com- 


*  i 


i  I 

'■     ! 


!| 


i 


-Kl 


^I^«^!l??lr 


200 


ESSENTIALS   OF    ECONOMIC   THEORY 


i- 


■■it 

■f    I 
11    I 


petitor  has  an  advantage  over  another  in  his  mode  of 
creating  a  product,  there  is  no  equiHbrium  within  the 
subgroup.      The   more  efficient   user  ot   labor  and 
\  capital  is  able  to  draw  away  labor  and  capital  from 
',the  less  efficient  one,  and  the  self-seeking  impulse 
^hich  is  at  the  basis  of  competition  impels  him  to  do 
^.    The  producer  who  works  at  the  greater  advantage 
'p  foreordained  to  under bi,!  and  supplant  the  one 
tvho  works  under  more  unfavorable  conditions.    That 
a  static   state  may  exist  and  that  the  movements 
of  labor  and  capital  from  point  to  point  may  be  pre- 
cluded, every  competitor  within  a  subgroup  must  be 
able  to  keep  his  business  intact,  hold  his  customers, 
and  retain  in  his  employment  all  the  labor  and  the 
capital  that  he  has. 

Eqtmlity  of  Size  of  Productive  Establishments  not 
Necessary.  —  Size  is,  as  we  shall  see,  an  element  of 
efficiency,  and  the  great  establishment  often  sells 
goods  for  less  than  it  would  cost  a  small  one  to  make 
them.    The  small  manufacturer  often  finds  thac  he 
would  best  become  a  mere  merchant,  buying  some  of 
the  products  of  the  great  mill  and  selling  them  to  his 
customers,  rather  than  continue  making  similar  goods. 
In  the  general  market  an  approach  to  equality  of  size 
is  usually  necessary  in  order  that  competitors  may  be 
on  even  terms.     This  does  not  preclude  the  survival 
of  many  small  establishments.    The  local  retailers 
have  an  advantage  over  great  department  stores  in 
the  filling  of  small  orders.     When  one  has  to  buy  what 
costs  a  dollar  it  does  not  pay  to  spend  a  dime  in  car- 
fares, and  waste  a  dollar's  worth  of  t''nie  in  order 
to  secure  the  thing  for  ninety  cents,     ^^'eariness  to 
customers  is  here  the  element  that  gives  to  the  small 
producer  his  advantage  and  enaoles  him  to  keep  that 


ECONOMIC   DYNAMICS 


201 


part  of  the  business  which  comes  in  the  form  of  many 
small  orilers;  but  small  producers  often  have  other 
advantages  than  those  which  depend  on  location. 
In  a  shop  which  is  more  like  that  of  a  craftsman  of 
three  centuries  ago  than  it  is  like  the  great  furniture 
factory,  a  cabii.etmaker  can  make  a  single  chair  of 
a  special  pattern  more  cheaply  than  the  great  manu- 
facturer can  afford  to  do  it.  The  great  shop  requires 
that  there  should  be  many  articles  of  a  kind  turned 
out  by  its  elaborate  machines  in  order  that  the  owner 
should  get  the  benefit  of  their  rapid  and  unerring 
action.  There  will  long  be  at  work  hand  presses 
much  like  those  used  by  Benjamin  Fraiiklin,  besides 
the  complicated  automata  which  do  the  bulk  of  our 
printing,  because  for  printing  a  dozen  copies  of  any- 
thing the  lever  press  is  the  cheaper.  There  will  be 
shoemakers  who  not  only  mend  shoes  but  occasionally 
make  them  for  customers  who  want  other  than 
standard  kinds ;  and  local  tailors  are  sure  to  survive. 
Only  in  the  general  market  and  in  the  making  of 
standard  goods  is  size  essential  to  success. 

A  Considerable  Number  of  Competitors  Assumed.  — 
The  most  strikmg  phenomenon  of  our  time  is  the 
consolidation  of  independent  establishments  by  the 
forming  of  what  are  usually  called  trusts;  and  this 
and  all  the  approaches  to  it  are  precluded  by  the  static 
hypothesis.  There  is  a  question  whether,  aiter 
competition  has  reduced  the  establishments  in  one 
subgroup  to  a  half  dozen  or  less,  they  would  not,  even 
without  forming  a  trust,  act  as  a  quasi-monopoly. 
This  question  we  have  at  the  proper  point  fully  to 
discuss,  but  here  it  is  necessary  to  assume  th.at  nntis- 
ing  which  creates  even  a  quasi-monopoly  exists. 
V.'e  shall  find  that  competition  usually  would,  in 


i 


1 


'? 


i 


i 


! 
^1 


1 1 

i  i 


11 


202 


ESSENTIALS   OF   ECONOMIC   THEORY 


fact,  survive  and  be  extremely  effective  among  as 
few  as  five  or  six  comprtitors,  till  they  formed  some 
sort  of  union  with  each  other.  To  avoid  all  uncertainty 
we  assume  that  in  the  static  state  in  which  values, 
wages,  and  interest  are  natural  and  in  which  each  sub- 
group has  its  perfectly  normal  share  of  labor  and  capital, 
there  are  competitors  enough  in  each  occupation  to 
preclude  all  question  as  to  the  continuance  of  an 
active  rivalry. 

Static  Values  and  Prices.  —  The  equilibrium  re- 
ferred to  requires  that  all  values  should  stand  at  their 
static  levels,  which  means  that  the  prices  of  goods 
should  be  the  "cost  prices"  of  the  older  economists. 
The  entrepreneur  should  make  no  net  profit  on  the 
goods  he  is  producing.  The  wagos  of  labor  must  be 
productivity  wages,  since  each  man  must  get  the 
amount  of  wealth  that  he  brings  into  existen'-e. 
Interest;  on  capital  needs,  in  like  manner,  to  be  pro- 
ductivity interest,  and  each  unit  of  capital  must  get 
the  amount  it  creates.  Moreover,  the  prices  of  goods, 
as  expresscnl  in  money,  must  l>e  accurate  representa- 
tions of  tlic  comparative  values  of  goods.  All  these 
features  mark  the  static  state;  but  the  most  obvious 
mark  of  distinction  is  the  absence  of  movement  from 
group  to  group.  We  shall  see  that  values  are  ulti- 
mately measured  in  marginal  labor,  and  as  the  value 
of  money  is  measured  in  the  same  way,  it  follows  that 
the  price  of  each  article,  as  expressed  in  money,  is  in  a 
static  state  a  correct  expression  of  the  comparative 
amount  of  labor  that  will  make  it.  And  the  entire 
relation  of  commodities  to  each  other  and  to  labor  can 
be  expressed  by  the  medium  of  currency.  If  a  nit  of 
labor  produces  gold  enough  to  make  an  eagle,  and  if 
any  commodity  sells  for  ten  tlollars,  it  will  be  safe  to 


|^«^" 


ECONOMIC    DYNAMICS 


203 


infer  that  it  is  also  produced  by  one  unit  of  labor. 
If  one  commodity  sells  for  ten  dollars  and  another 
for  five  dollars,  the  former  is  the  product  of  twice  as 
many  units  of  marginal  labor  as  is  the  latter.  This 
remains  true  only  while  currency  continues  to  bo  in 
its  normal  state  and  all  other  static  adjustments 
continue  complete. 

Influences  that  disturb  the  Static  Equilibrium.  — 
It  might  seem  that  the  influences  that  disturb  such 
a  static  equilibrium  are  too  numerous  to  be  described ; 
and  yet  these  changes  may  be  classed  under  five 
general  types :  — 

1.  Growth  of  Population.  —  The  supply  of  labor  is 
increasing,  and  this  fact  of  itself  calls  for  continual 
readjustment  of  the  group  system. 

2.  Increase  of  Capital.  —  The  amount  of  capital 
is  increasing,  and  this  change  also  disturbs  the  static 
equilibrium  and  calls  for  a  rearrangement.  As  far 
as  wages  and  interest  are  concerned,  the  effect  of  this 
latter  change  is  the  opposite  of  that  which  follows 
an  increase  in  the  amount  of  labor.  When  people 
become  more  numerous,  other  things  remaining  equal, 
their  individual  earning  capacity  becomes  smaller. 
The  increase  of  capital  reduces  the  earning  power  of 
each  unit  of  the  supply  of  it  and  depresses  the  rate  of 
interest;  but  it  raises  the  rate  of  wages,  for  it  causes 
labor  itself  to  act  more  efficiently. 

It  is  to  be  noted,  indeed,  that  when  new  laborers 
enter  society  they  become  consun-"'-s  as  well  as  pro- 
ducers, and  this  affects  the  utility  and  the  value  of 
goods.  When  more  people  use  a  given  amount  of 
consumers'  wealth,  values,  measured  in  ultimate  units 
of  utility  or  disutility,  rise.  An  increase  of  capital 
does  net  directly  neutralize  this  effect,  since  it  does 


{111 
HI 


^:>*gi:  -^  ^mip..  'it^/^'^^^ri^mm^  '^-^JOus^i^vc::^ 


f  r 


II 


204 


ESSENTIALS   OF    ECONOMIC   THEORY 


not  change  the  number  of  consumers ;  but  it  multiplies 
commodities  and  brings  down  their  utilities  and  their 
values.  The  rise  of  "subjective "  values  which  follows 
an  influx  of  laborers  is  an  indication  of  diminished 
wealth  per  capita,  and  the  reduction  of  values  which 
follows  an  influx  of  capital  is  a  sign  of  increased 
wealth  per  capita. 

3.  Changes  of  Method.  —  Changes  take  place  in 
the  methods  of  production.  New  processes  are  de- 
vised, improved  machines  are  invented,  cheap  motive 
powers  are  utilized,  and  cheap  and  available  raw  ma- 
terials are  discovered,  and  these  changes  continu- 
ally disturb  the  static  state.  There  a/e  certain  to  be 
improvements  on  the  older  methods  of  production, 
for  a  law  of  the  survival  of  the  fittest  insures  this. 

Under  competition  the  process  that,  with  a  given 
amount  of  labor  and  capital,  turns  out  a  larger  product 
inevitably  displaces  one  that  turns  out  less.  The 
employer  who  is  using  the  better  method  undersells 
those  who  use  inferior  ones,  and  forces  them  either  to 
improve  their  own  methods  or  to  go  out  of  business. 
Working  humanity  as  a  whole  is  therefore  making  a 
constant  gain  in  producing  power,  as  man's  appliances 
equip  him  more  and  more  effectively  for  his  conflict 
with  nature  and  enable  him  to  subjugate  it  more 
rapidly  and  thoroughly.  It  would  seem  that  they 
ought  to  have  only  good  effects  on  wages,  and  in  the 
long  run  they  invariably  do  have  such  effects.  In  the 
absence  of  improvements  there  woukl  be  little  hope 
for  the  future  of  wage  earners.  The  immediate  effects 
of  improvements  upon  individual  workers,  as  we  shall 
see,  are  not  always  unqualifiedly  good,  but  the  essen- 
tial effect  is  the  general  and  permanent  one,  and  the 
character  of  this  has  been  attested  by  past  experience 


M 


fl-V 


tfSwi 


A  *'-^^ 


'k:^ 


>ij 


■^*l^k 


i^^m^^jVi^i^^MsysK^^ 


ECONOMIC    DYNAMICS 


205 


too  fully  to  be  in  doubt.  In  improvements  in  produc- 
tion lies  the  hope  of  lal)oring  humanity.  Nearly  the 
whole  earning  power  of  the  labor  of  the  present  day 
is  the  result  of  improvements  that  hav(!  taken  place 
in  the  past,  though  these  gains  have  not  l)een  secured 
without  causing  local  and  temporary  hardships.  If 
in  the  future  the  wages  of  lalM)r  are  (h)ul)led  or  (juad- 
rupled,  as  the  result  of  a  series  of  improveinents 
beginning  now  and  extending  to  a  remote  period,  this 
progress  cannot  be  secured  for  nothing.  The  costs 
will  be  less  than  those  attending  improvements  of  the 
past,  '"ut  they  will  be  real.  The  most  important 
fact  is  that  they  tend  to  become  fewer  and  smaller 
and  that  the  gains  immeasurably  exceed  them. 

4.  Changes  in  Organization.  —  There  are  changes 
in  the  mode  of  organizing  the  establishments  in  which 
commodities  are  produceil,  and  so  far  as  these  occur 
under  a  regime  of  active  competition,  they  also  are 
improvements  and  give  added  power  of  production. 
The  mills  and  shops  become  larger  and  relatively 
fewer.  There  is  a  great  centralizing  movement  going 
on,  since  the  large  shop  undersells  and  suppresses  the 
smaller  one,  and  combinations  unite  many  great  shops 
under  one  management.  The  effect  of  this,  when  it 
takes  place  in  a  perfectly  normal  way,  is  akin  to  that 
of  improvements  of  method.  It  benefits  society  as 
a  whole  somewhat  at  the  cost  of  individual  members 
of  the  body,  and  it  causes  wages  to  rise  by  adding 
continually  to  the  wealth-creating  power  of  the  men 
who  earn  them.  We  shall  see  that  when  consolida- 
tions repress  competition  their  effect  is  far  from  being 
thus  wholly  beneficial,  and  that  not  only  are  particu- 
lar pei-sons  injured  by  them,  but  the  cunuiiunity  as  a 
whole  has  a  .'ierious  bill  of  charges  to  bring  against 


§mm 


206 


ESSENTIALS   OF   i!:CONOMIC   THEORY 


! 


II 


thorn.  The  socuring  of  th^  gains  that  come  by  con- 
soli(hition  vvitliuut  such  evils  is  an  end  the  realization 
of  wliich  will  tax  the  statesmanship  of  the  future, 

f).   Changes   in   Consumers'    Wants.  —  The    wants 
of  consumers  are  changing.    They  are  growing  more 
numerous  as  will  as  more;  refined  and  intellectual. 
This  expansion  of  desires  follows  the  general  increase 
of  productive  power,  since  (ivory  one  already  wants 
some  things  that  he  camiot  procure,  "iid  all  society 
has  a  fringe  of  ungratified  wants  juso     yond  the  limit 
of  actual  gratification.     Even  if  all  these  wants  that 
are  now  near  the  point  of  actual  satisfaction  were  to 
be  satisfied,  the  desires  would  at  once  project  them- 
selves farther.     The  mere  increase  in  earning  power 
without   any   special   education   enbrges   the   want 
scale,  but  int(>ll('ctual  and  moral  growth  cooperates 
with  it  in  that  direction  and  calls  latent  wants  into 
an  active  state.     More  ami  more  eagerly  do  men  seek 
things  for  which    he  desire  was  formerly  dormant. 
Chang(>s  of  this  kind  affect  values,  cause  labor  and 
capital  to  move  from  group  to  group  and  thus  cause 
society  as  a  whole  to  produce  less  of  some  things  and 
more  of  others.    They  sometimes  cause  wholly  new 
groups  to  appear,  and  draw  workers  and  equipment 
from  the  old  ones. 

Advantage  of  Diversity  of  Wants.  —  One  very 
marki'd  effect  of  the  diversification  of  wants  is  to  in- 
crease the  aggregate  utility  of  a  mass  of  commodity 
produced  with  a  given  expenditure  of  labor.  Measure 
the  wliole  wealth  available  for  consumption  on  the 
basis  of  the  labor  that  it  takes  to  create  it,  and  it  v/ill 
appear  that  it  has  more  utility  and  is  worth  more  to 
society  iii  ooiiMMiuenee  of  this  evolution  that  is  going 
on  in  the  nature  of  the  individual  consumer.    A 


Mi.ui^^^'Alim'^^i 


ECONOMIC    DYNAMICS 


ff^'j^^v^^^.-r^.^.. 


207 


given  amount  of  labor  benefits  most  the  men  whose 
wants  are  of  the  most  varie<l  character.  If  A,  B, 
and  C  are  three  commodities,  and  if  their  several 
utilities  decline,  as  si; 'cessive  units  of  them  are  f^iven 
to  a  consumer,  along  the  curves  descetiditif?  from  the 
letters  A,  B,  and  C  of  the  diagram,  it  is  dear  that  tlie 
man  whose  consumption  is  confined  to  the  coiiunodity 
A  gets  less  benefit  from  three  units  of  wealth  than 
docs  the  man  who  con- 
sumes A,  B,  and  C. 
The  utility  of  t!ie  first 
unit  of  A  is  measured 
by  the  vertical  line 
from  A  to  the  line  DE, 
that  of  the  second  by 
the  line  from  A'  to 
DE,  and  that  of  the 

third  by  the  line  from  A"  to  DE.  The  utility  of  the 
first  unit  of  B  is  measured  by  the  distance  from  B  to 
the  line  DE  and  exceeds  that  of  the  second  unit  of  A 
by  the  difference  between  the  lengths  of  those  lines. 
In  like  mannrr  tlie  ulility  of  C  exceeds  that  of  the 
third  unit  of  A  by  the  ditferenco  between  the  length 
of  the  line  descending  from  C  and  that  of  the  one 
descending  from  A".  The  tleclining  utility  of  the 
income  of  the  man  who  satisfies  three  wants  is  repre- 
sented by  the  slowly  descending  curve  ABC,  while 
the  diminishing  utility  of  the  income  of  the  man  who 
satisfies  only  one  want  declines  along  the  sharply  de- 
scending curve  A,  A',  A".^ 

'  For  studies  of  the  :ffect  of  diversified  wants,  see  S.  N. 
Patten,  "Consumption  of  Wealth."  It  wi!!  he  •scon  that  ac- 
count must  be  taken  first  of  the  natural  expansion  of  the  want 
which  comes  from  an  increase  of  productive  power,  ana  sccono' 


i 

SI 


1  ■■ 


I 


f 


208 


ESSENTIALS  OF    ECONOMIC   THEORY 


Changes  in  Static  Standards.  —  Tlio  grand  resultaut 

of  all  the  changes  that  are  going  on  in  the  more  highly 

civilized  countries  is  a  continual  rise,  not  only  in 

actual  wages  but  in  the  theoretical  standard  of  wages. 

The  static  or  "natural"  rate  of  pay  for  labor  to-day 

is  higher  than  it  was  .ifty  years  ago  and  lower  than  it 

will  naturally  be  fifty  years  hence.     Removing  all 

disturbing  influences  and  letting  society  settle  to-day 

into  a  perfectly  static   condition  would  reveal  the 

theoretical  standard  of  present  wages.     Doing  the 

same  thing  after  a  lapse  of   fifty  years  would  show 

what  would  then  be  the  natural  or  standard   rate; 

and  this  would  be  higher  than  the  prcser.c  one.     Not 

only  would  the  actual  pay  of  labor  have  risen,  but  the 

standard  to  which  it  tends  to  conform  would  have 

become  higher  after  every  Interval.     The  actual  rate 

of  wages  at  any  one  time  varies  from  the  standard; 

but  as  both  rise  from  decade  to  decade,  the  actual 

rate  hovers  all  the  while  within  a  certain  distance  of 

'  the  standard  one. 

Effects  on  Values.  —  In  the  same  way  the  values  of 
goods  measured  in  labor  will  in  general  be  decliuiii"- 
Values.  At  no  one  time  will  actual  market  prices 
accurately  express  the  amounts  of  murginal  labor  that 
are  required  for  producing  diiTerent  articles,  l)ut  they 
will  ap[>roximately  express  this.  Articles  will  scl! 
in  the  market  for  about  enough  to  pay  for  the  labor 
that,  when  used  as  marginal  labor,  suffices  to  produce 
them ;  and  as  this  amount  of  labor  put  into  a  given 
article  grows  less  and  less,  the  prices  of  the  goods 
will  actually  pay  for  fewer  and  fewer  days'  labor. 

of  thn  changes  ir,  the  quality  of  the  wants  to  ho  Rratifipd,  which 
winirtHnes  go  ahr;!il  nf  r.ny  ch,ir<o  in  tho  produclive  bystem 
and  call  for  new  kinds  of  commoditie,-- 


ECONOMIC    DYNAMICS 


209 


The  standard  price  of  anytning  will  be  the  amount 
of  money  that  i.s  needed  to  pay  for  the  labor  of  making 
it,  provided  always  that  we  are  careful  to  use  only 
empty-handed  labor  in  applying  the  test  and  that  we 
put  that  labor  in  the  marginal  position,  as  described 
in  Chap.  •  "  !  *'  run!  V,  and  so  disentangle  t'ic  product 
that  is  a  trii)sit;ii)lc  to  •■,  from  that  which  is  imputable 
to  capit  :.  If  Viiges,  as  paid  in  money,  remain  sta- 
tionary, iiuiwvd  ;!ricrri  vvill  decline  and  actual  prices 
will  hover  about  them  in  their  downward  course,  so 
that  gootls  will  actually  buy  smaller  and  smaller 
amounts  of  labor,  or,  what  is  the  same  thing,  labor 
will  secure  as  its  pay  more  and  more  goods.' 

'  In  measurint;  the  cost  of  goods  in  labor,  in  Chapters  IV 
and  V,  wo  (iisciitanRlt'd  from  the  amount  of  goods  which 
is  tlio  joint  product  of  hibor  and  capital,  the  part  which  is 
attributable  to  labor  only.  The  mode  of  doing  thi.s  is  there 
more  fully  .  tated.  The  old  and  crude  method  of  using  a 
labor  standard  of  value  —  which  assumes  that  the  product 
of  a  unit  of  labor  aided  by  capital  will  always  buy  the  product  of 
another  unit  of  labor  aided  by  capital  —  we  must  take  all 
pains  to  .avoid. 

In  connection  with  the  cost  in  labor  of  different  articles 
it  is  to  be  remembered  that  in  agriculture  the  effect  of  im- 
provements of  method  may  not  always  suffice  to  counttract 
the  working  of  the  so-called  law  of  diminishing  returns, 
which  insures,  witl<  agricultural  science  in  a  given  state  of 
advancement,  smaller  products  per  capita  when  there  arc 
more  men  on  a  given  area.  That  this  influence  should  pre- 
ponderate over  that  of  improved  processes  requires  that  popu- 
lation should  increase  with  a  degree  of  rapidity  which  may 
or  may  not  be  maintained. 


t   ; 


!    I 


if 


i 


CHAPTER  XIII 

THE    LIMITS    OF   AN    ECONOMIC   SOCIETY 

When  we  try  to  establish  a  standard  to  which 
wages  generally  tend  to  conform,  the  question  arises 
how  much  of  the  earth  we  have  in  view.     Is  there  a 
rate   at   which  the  pay  of  labor  in  Europe,  Asia, 
Africa,  Australia,  and  America  tends  to  settle  and 
remain  ?    Is  there  a  common  rate  of  interest  that  is 
normal  in  all  these  grand  divisions,  and  are  there  also 
general  standards  of  value  for  goods  which  govern 
their  prices  in  all  the  markets  of  the  world  ?    If  there 
are  no  such  standards  having  universal  validity,  are 
there  any  that  are  valid  within  single  geographical 
divisions?    On   what   principle  can  we   divide   the 
earth  into  sections  for  economic   purposes?    These 
are  some  of  t'  i  questions  which  must  be  answered 
if  a  theory  of  distribution  is  to  have  any  definiteness 
of  meaning,  and  they  arise  whenever  we  try  to  es- 
tablish a  static  standard  of  any  kind.     If  we  talk 
about  natural  wages,  we  nmst  know  in  how  much  of 
the  world  they  are  natural.    The  questions  become 
even  more  urgent  when  we  try  to  solve  dynamic 
problen)s.    We  shall  have  to  determine  the  efTects 
of  an  influx  of  labor  into  the  economic  society  we 
are  studying;    but  does  this  mean  an  increase  of 
population  in  the  world  as  a  whole?    Does  an  influx 
of  capital  have  a  similar  comprehensive  meaning, 
and^  does  an  improvement  in  the  method  of  pro- 
ducing  some    commodity   mean   a   change    in   the 

210 


THE   LIMITS   OF   AN    ECONOMIC   SOCIETY  211 


mode  of  making  it  in  every  part  of  the  world  where 
it  is  produced  at  all?  We  need  to  know  how  ex- 
t  isive  the  society  is  whose  activities  we  are 
examining. 

Characteristics  of  an  Economic  Society.  —  We  have- 
said  that  there  are  natural  rates  of  wages,  etc., 
within  some  area,  which  we  have  regarded  as  con- 
taining an  economic  society,  and  we  have  treated 
this  social  organism  much  as  though  it  were  as 
isolated  and  self-contained  as  would  be  an  inacces- 
sible island  with  its  population.  It  has  one  general 
market  where  values  are  fixed.  A  farmer  within 
the  area  covered  by  our  studies  produces  wheat 
for  the  whole  society,  and  in  one  way  or  another, 
every  person  within  the  area  is  a  bidder  for  it.  A 
shoemaker  makes  shoes  and  a  weaver  makes  cloth 
to  offer  to  everybody.  Each  part  of  the  organism 
ministers  to  the  whole  and  is  ministered  to  by  the 
whole.  Competition  is  ideally  free  and  in  a  sense 
is  universal.  The  general  system  of  groups  made 
up  of  the  A's,  the  B's,  the  C's,  and  the  H',  .  "  our 
table  illustrates  the  manner  in  which  this  com- 
plete and  self-contained  society  is  organised.  In 
the  static  state  there  is  one  standard  of  wages  for 
all  these  groups  and  their  subdivisions  and  one 
equally  general  standard  of  interest.  The  price 
of  a  commodity,  barring  some  allowance  for  cost 
of  carrying  it,  is  uniform  everywhere.  A  reduced 
price  for  A'"  in  any  part  of  the  area  where  this 
society  dwells  would  set  men  bidding  for  it  from 
every  quarter  of  that  area  and  would  thus  bring  | 
the  local  prices  to  uniformity.  So  a  high  rate  of 
pay  for  labor  in  one  part  would  a*  once  lure  men  I 
from  every  other  part  and  reduce  the  high  pay  to 


t 


212 


ESSENTIALS  OP  ECONOMIC  THEORY 


5f 


I 


S  •? 


, 


the  standard  generally  prevailing.  The  picture  is 
that  of  a  social  body  having  a  large  .graphical 
extension  and  yet  intensely  sensitive  jt  vciy  point 
to  economic  influences.  Prices,  wages,  and  interest 
everywhere  respond  at  onco  to  an  influence  that 
originates  in  any  part  of  the  extended  area.  In 
technical  terms  this  means  that  there  is  perfect  mo- 
bility of  labor  and  capital  within  the  group  system 
represented  by  the  table,  and  that  this  involves 
efjually  perfect  mobility  as  between  parts  of  the 
area  that  the  groups  inhabit.  Men  move  from  one 
section  of  the  country  to  another  in  response  to  an 
economic  inducement  as  readily  as  they  do  from 
the  group  A  to  the  group  B. 

Barriers  which  divide  the  World  into  Economic 
Sectio.is.  —  Now  it  is  clear  that  in  the  actual  world 
changing  one's  place  of  abode  is  difficult,  and  even 
sending  capital  from  place  to  place  is  somewhat  so. 
Inequalities  of  earning  power  are  not  leveled  out 
by  a  quick  migration  of  laborers  from  China  to 
Europe  or  to  America.  In  their  methods  of  pro- 
duction the  different  regions  are  not  brought  to 
a  uniformity,  for  there  is  machine  labor  here  and 
hand  labor  there;  and  it  is  vain  to  expect  that  ma- 
chines will  quickly  become  universal  and  that  the 
practical  arts  in  America,  Africa,  and  Asia  will  be 
rendered  uniform  by  such  a  quick  adoption  of  the 
most  efficient  processes  as  economic  law,  in  the 
absence  of  friction,  requires. 

Boundaries  of  the  Society  which  is  here  Studied.  — 

I  If  we  take  the  world  as  a  whole  into  the  circle  covered 

by  our  studies,  we  find  that  labor,  compared  with 

other   economic   elements,   decidedly   lacks    fluidity 

and  does  not  easily  move.    So  far  from  being  like 


THE   LIMITS   OF   AN    ECONOMIC   SOCIETY 


213 


water,  which  flows  readily  and  finds  its  level  quickly, 
it  is  more  like  tar  or  other  viscous  stuff,  which  flows 
slowly  and  is  long  in  leveling  out  local  irregularities 
in  its  surface.  In  the  world  as  a  whole  there  are 
regions  crowded  with  people  and  other  regions 
nearly  unpeopled,  and  long  will  it  be  before  some  of 
these  differences  will  be  much  reduced.  Many 
centuries,  indeed,  must  pass  befo  e  they  are  entirely 
removed.  If,  however,  we  take  the  most  active 
part  of  the  world,  —  western  Europe,  most  of  North 
America,  Japan,  and  the  more  fully  settled  parts  of 
Australia,  —  labor  will  show  a  degree  of  mobility 
that  makes  it  more  like  the  water  of  the  illustration, 
and  capital  within  this  active  center  of  industrial 
operations  will  be  more  fluid  still.  Prices  here 
tend  toward  certain  general  standards,  and  pro- 
cesses of  production  and  methods  of  organizing  the 
forces  which  do  the  producing  work  tend  strongly 
toward  uniformity.  The  best  processes  and  the 
best  forms  of  organization  tend  generally  to  survive 
There  are  imperative  reasons  for  studying  the  econ- 
omy of  this  highly  civilized  region,  the  center 
of  the  economic  activities  of  the  world,  apart  from 
that  of  the  more  undeveloped  regions.' 

The  Need  of  a  Rule  by  ivhich  a  Part  of  the  World 
may  be  Treated  as  an  Economic  Sociffy.  --This  in- 
volves finding  a  way  by  which  we  can  treat  a  limited 
part  of  the  world  nuich  as  though  it  were,  for  our 
purposes,  the  whole  of  it.  In  essential  ways  the 
economic  center  that  we  have  described  does  act 


r 


•  This  is  far  from  implying  that  economic  laws  do  not 
work  in  Uie  t'xcliidcil  outer  area  or  tiiat  nf)  effects  are  produceti 
within  the  central  area  by  causes  that  originate  in  the  outer 
zone.     How  these  things  take  place  we  shall  later  see. 


' 


214 


ESSENTIALS   OF    ECONOMIC   THEORY 


somewhat  as  if  it  were  an  organism  complete  in 
itself.  We  must  draw  a  boundary  line  about  tlic 
area  of  active  movement,  of  lively  interchanges, 
and  of  general  sensitiveness  to  economic  influences, 
thus  separating  it  from  the  broader  zone  of  sluggish 
movement  of  capital  and  population,  of  slow  response 
to  economic  stimuli,  and  of  generally  backward 
conditions. 

Freedom  of  Movement  as  a  Test.  —  In  Europe, 
America,  and  the  other  advanced  regions  goods 
are  carried  from  place  to  place  so  easily  and  quickly 
that  there  is  a  tendency  toward  uniform  prices; 
and  such  local  differences  of  price  as  exist  in  the 
case  of  any  commodity  do  not  nmch  exceed  the 
cost  of  gettmg  it  carried  from  one  place  to  another, 
though  in  the  cost  of  moving  it  there  must  often 
be  reckoned  the  toll  which  a  government  takes  at 
the  customhouse.  Capital  moves  freely,  and  there 
is  a  certain  approach  to  a  general  level  of  interest, 
though  here  also  local  differences  of  course  survive. 
g  The  obstacle  to  the  moving  of  capital  from  one 
I  ]  place  to  another,  if  the  owner  does  not  go  with  it, 
',  is  occasioned  mainly  by  the  risk  it  encounters  and 
by  a  virtual  bill  for  insurance.  With  allowance 
for  this  cost,  rates  of  interest  in  the  region  we  have 
described  tend  toward  a  general  level.  Though 
labor  migrates  more  slowly  than  capital,  it  moves 
far  more  rapidly  within  tlie  economic  center  than 
in  the  outer  zones.  Processes  of  production  are 
not  brought  to  a  complete  uniformity  within  the 
center,  but  they  tend  powerf.dly  toward  it;  for 
while  obstructions  exist,  they  surely  and  not  always 
slowly  yield.  With  due  regard  for  such  differences 
of  method  as  those  existing  between  the  European 


f-  * 


THE    LIMITS   OF   AN    ECONOMIC   SOCIETY 


215 


..l\ 


ways  of  making  products  and  the  American  ways, 
we  may  say  that  the  tendency  toward  the  general 
survival  of  the  best  methods  is  too  strong  to  allow 
any  important  differences  to  be  permanent.  Every- 
where, in  short,  within  the  central  area  there  is 
a  strong  tendency  to  conform  to  economic  standards 
in  the  matter  of  prices,  wages,  interest,  industrial 
processes,  and  forms  of  economic  organization.  The 
standards  are  what  we  have  defined  as  the  static 
ones.  If  we  should  stop  progress  and  all  disturb- 
ing influences  and  wait  long  enough,  we  should 
see  values,  wages,  interest,  etc.,  take  a  static  level 
throughout  the  vast  area.  This,  however,  would 
require  that  migrations  should  go  on  till  all  induce- 
ment to  move  from  place  to  place  should  have  ceased 
to  exist.  Population  would  then  have  distributed 
itself  over  the  land  in  the  most  advantageous  way, 
and  no  body  of  people  would  be  better  off  than  any 
other  by  reason  of  the  location  of  their  abode.  A 
long  period  would  be  needed  to  bring  about  this 
adjustment  even  within  the  circumscribed  area  where 
influences  that  make  for  change  are  very  active 
and  where  obstacles  are  far  smaller  than  they  are 
in  the  uncivilized  regions. 

Essential  Density  of  f  .>pulation.  —  A  perfectly 
static  state  requires,  not  a  perfectly  equal  distribu- 
tion of  population,  but  such  a  distribution  that  there 
is  no  reason  for  further  migrating.  The  power  of 
the  soil  to  feed  its  inhabitants  varies  with  its  fertility. 
Where  the  land  is  highly  productive  a  dense  popu- 
lation may  live  easily ;  whereas  on  a  sterile  soil  even 
a  sparse  population  may  find  natural  resources  too 
meager,  and  men  may  move  to  places  which  are 
more  thickly  peopled  and  yet  may  gain  by  the  change. 


i.-tl 


?  M  ■ 


'^:%<^:^JM^. 


216 


ESSENTIALS   OF    ECONOMIC   THEORY 


il 


Moreover,  such  occupations  as  manufacturing  and 
commerce  require,  of  course,  a  far  larger  population 
on  a  given  area  than  does  any  form  of  agriculture. 
Some  regions  are  so  undesirable  as  dwelling  plac  s 
that  it  takes  an  exceptional  economic  reward  to  induce 
men  to  live  there.  The  static  state  is  one  in  which, 
all  these  things  being  considered,  there  is  no  reason 
for  changing  the  place  of  one's  abode.  This  implies 
more  nearly  eciual  density  per  unit  of  natural  re- 
sources than  equal  density  per  unit  of  mere  area. 
Inequality  of  advantage  due  to  location  is  what 
is  leveled  out,  and  doing  this  does  not  require  nor 
permit  that  population  should  everywhere  be  equally 
dense  per  square  mile  or  per  acre. 

Effect  of  Differences  of  Occvpatim.  —  Regions  given 
over  to  agriculture  naturally  sustain  more  people 
than  those  devoted  to  grazing,  and  those  which  are 
devoted  to  manufacturing  sustain  more  than  either. 
In  countries  in  which,  as  in  Great  Britain,  manu- 
facturing is  so  disproportionately  developed  that 
products  must  be  largely  exported,  while  food  must 
be  largely  imported,  given  areas  sustain  more  in- 
habitants than  they  do  in  any  agricultural  or  graz- 
ing region  and  more  than  they  do  in  any  region 
where  grazing  and  tillage,  on  the  one  hand,  and 
manufacturing,  on  the  other,  are  well  balanced. 
In  mills  and  shops  auxiliary  capital  so  abounds  as 
to  take  the  place  of  the  abundant  land  that  is  avail- 
able in  the  other  cases  for  making  labor  fruitful, 
and  in  villages  and  cities  labor  tioes  not  overtax 
the  resources  of  the  soil  any  more  than  it  does  on 
farms.  It  has  area  enough  to  live  and  to  work  on 
and  tools  and  materials  enough  to  work  with.  In 
a  generally  crowded   country,   the   resort  to   com- 


w\^:i^':r^':::-s 


THE    LIMITS   OF    AN    ECONOMIC    SOCIETY 


217 


mercc  and  manufacturing  relievos  the  jiressure  on 
the  land,  cities  abound,  and  an  abunchince  of  capital 
averts  the  danger  of  a  disastrous  owrcrowdiiig. 

An  approximately  Static  Distribution  of  Popula- 
tion. —  The  apportionment  of  population  among 
the  different  sections  of  a  country  may  be  nearly 
normal,  while  migration  may  still  go  on  from  that 
country  as  a  whole  to  remote  parts  of  the  general 
area  which  we  include  in  our  present  stuily.  There 
may  be  small  reason  for  moving  from  one  part  of 
Germany  to  another  and  large  reason  for  going 
from  Germany  to  America.  This  larger  movement 
occupies  a  long  time,  while  certain  other  adjust- 
ments may  be  made  more  (juickly.  Within  (!(>nnany 
and  within  the  United  States  labor  may  be  well  aj)- 
portioned  among  the  different  occupations.  Tiiere 
may  be  in  each  country  about  the  right  comparative 
numbers  of  cotton  spinners,  iron  workers,  gardeners, 
wheat  raisers,  etc.;  or  in  other  words,  the  distril>u- 
tion  of  labor  among  the  industrial  groups  may  be 
approximately  normal  both  within  the  one  country 
and  within  the  other.  It  may  further  be  true  that 
the  division  of  occupations  between  the  two  countries 
in  their  ntirety  is  about  what,  in  the  conditions 
now  prevailing,  economic  law  calls  for.  There  are 
certain  industries  which  now  have  their  habitats 
in  Germany  and  certain  others  that  have  their 
habitats  in  the  United  States,  and  this  arrangement 
is  partly  due  to  the  comparative  density  of  the  two 
populations.  Because  Ihere  are  so  many  persons 
per  square  mile  o*"  land  in  Germany  there  is 
there  a  certain  preponderance  of  manufacturing, 
and  there  are  in  America  less  manufacturing  and 
relatively  more  agriculture.     In  that  remote  time 


I  t 


t    f..:i1 


■i    H  ' 

ft' 


218 


E8SKNTIAL8    OF    ECONOMIC   THEORY 


when  the  relative  density  of  the  two  populations 
shall  become  static,  America  will  have  reason  to 
increase  the  comparative  amount  of  the  manu- 
facturing and  thus  put  herself  in  this  i)articular 
more  nearly  on  a  i)lane  with  Gennany.  This 
occupation  has  its  normal  abode  in  regions  of  com- 
paratively dense  population,  and  a  gain  in  com- 
parative density  means  an  increase  in  the  amount 
of  productive  energy  devoted  to  it.  The  place  for 
the  mill  is  where  the  land  is  crowded,  and  the  better 
place  for  the  work  of  tillage  is  where  it  is  not  so.* 

Hoxo    an    Unnatural    Distribution    of   Population 
may  he  Treated.  — ^o  long  as  the  slow  movement 
of    population    from    country    to    country    remains 
incomplete,  the    ultimate    ilivision    of    occupations 
between    the    countries    can    never    be    completely 
static.     It  is  therefore   with  a  division  that  is  only 
Mpproximateiy   static   that   we   have   first   to   deal, 
and  this  is  realized  when  in  view  of  the  comparative 
density  of  pojmlation  in   the  different  regions  which 
now  exists  occupations  are  naturally  apportioned. 
The  base  line  AD  of  this  figure  stands  for  the 
part  of  the   world   in   which   economic   law  works 
rapitUy  and  encounters  comparatively  few  obstruc- 
tions;    and    the   extension    of   the   line    represents 
the  lands  outside  of  this  region  in  which  the  laws 
are  sluggish  in  their  action.     It  is  as  though  this 
base  line  were  a  section  of  a  vast  surface  including 
both  civilized  and  primitive  states.    AB  represents 

'  It  will  appear  that  manufacturing  reacts  on  the  density 
of  population,  first,  hy  retarding  emigration  from  the  thickly 
populated  country  as  a  whole;  and  secondly,  by  causing 
io.ui  niovetiients  withm  the  country,  whereby  cities  and 
villages  grow,  and  relieve  what  would  otherwise  be  an  excess 
of  labor  in  agricultural  regions. 


THK    LIMITS   OF    AN    ECONOMIC    SOCIETY 


219 


the  smallest  population  per  unit  of  land  of  a  given 
quality  within  the  central  area,  and  DC  represents 
the  largest,  while  the  ascending  line  BC  shows  the 
gradations  of  essential  density  in  the  peopling  of 
different  parts  of  it.  At  the  point  A  the  pressure 
of  the  population  on  the  resources  of  the  soil  is 
least,  while  at  the  point  D  it  is  at  its  greatest.    At 


the  point  A  a  man  can  get  much  out  of  the  soil  as 
the  return  for  his  own  hare  labor,  while  at  D  he  can 
get  comparatively  little;  and  at  intervenhig  points 
on  the  l;ase  a  man  gets  more  than  he  does  at  D  and 
less  than  he  does  at  A.  His  gains  measured  in 
bushels  of  wheat,  etc.,  vary  inversely  as  the  density 
of  the  population  and  so  decrease  from  the  left  of 
the  figure  toward  the  right  till  the  point  D  is  reached. 
The  occupations  of  the  different  localities  are  deter- 
mined by  these  facts. 

How  Occupations  vary  with  Differences  of  Land 
Crowding.  —  Crowding  the  arable  land  causes  labor 
to  flow  naturally  to  manufacturing  occupations^ 
since  in  these  it  is  not  so  greatly  handicapped  in 
comparison  with  the  labor  of  more  sparsely  peopled 
regions.  In  a  cotton  mill  in  Manchester  a  man  mav 
contribute  as  many  yards  per  day  toward  the  prod- 
uct of  the  mill  as  he  would  in  a  mill  in  Fall  River; 


■'  n 


*l 


220 


ESSENTIALS   OF    ECONOMIC   THEORY 


but  on  an  Englisli  farm  one  man's  labor  docs  not 
create  a.s  much  produce  as  it  does    )n  an  American 
farm.     The  large  amount  of  available  land  per  man 
in  America  has  a  great  effect  on  the  amount  that 
a  man  can  produce  by  tilling  it,  but  it  has  very 
little  effect  on  the  amount  of  the  cotton  goods  that 
his  presence  and  labor  in  the  mill  insure.     In  rais- 
ing crops,  therefore,  th(>  Engli.«^hman  is  at  a  more 
serious  disadvantage  in  comparison  with  the  Ameri- 
can.   The  fact  is  exp.essed  in  a  practical  way  by 
saying   that   the    English   labor   is   cheaper  and    is 
therefore    more    available    for    making    things    that 
are  exported   to  the  distant   markets  of  the  world 
than  is  labor  of  the  same  kind  in  America;    but  the 
reason  for  this  cheapness  is  primarily  the  land  crowd- 
ing, which  reduces  the  pnxluctive  power  of  a  final 
unit  of  labor  in  the  foniier  country.     Because  the 
man  cannot  get  for  himself  many  bushels  of  wheat 
per  annum   by  working  on  land  he  can  afford   to 
work  in  a   mill  at   a  rate  corresponding  with   the 
value  of  the  produce  he  could  secure  as  a  cultivator.' 
General     Dijferences     helxvcen     the     Condithm     of 
Demely  Peopled  Regiom  and  that  of  Sparsely  Peopled 
Ones.  — In  a  vt-ry  general  way  it  may  be  said  that 
the  comparative  amount   of  manufacturing  should 
naturally  vary  directly  with  density  of  population, 
and    that    the   comparative   amount   of   agnruitun 
should  vary  inversely  to  it.     In  computing  dcusit-- 
due   regard   must,   as   has   JK-fo   indicated,    h-   p!i_.i 
to  the  quality  of  the  land  as  well  as  the  area.  Au^c 
a  number  of  inhabitants  which  would  undu.-      on- 

'  in   thk   <(.iiiu-cti()n   .«pe   the   discu.s.sion   of   the   pnnrmlp 
(.f  international  trade  in  .J.   S.    Mill's  "Principles  nf  Poiimai 
Economy,"   Book   III,  Chapter  XVI. 


THE    LIMITS   OF   AN    ECONOMIC   SOCIETY         221 


gost  a  sterile  aKrioultural  region  an  be  well  main- 
tained on  a  fertile  one.  In  tiie  aceojnpaiiying 
figure  the  line  AD  inclosed  hy  the  vertical  lines 
represents  the  part  of  the  earth  which  we  have 
called  eentral,  and  the  left  side  of  it  is  the  j)ai1  of 
this  area  which  has  the  sj)arsest  population,  while 
the  right  side  is  that  which  has  the  densest.  The 
rising  line  BC 
represents  the 
varying  density 
of  the  popula- 
tion in  different 
parts  of  the 
broad  area  we 
regard  as  gen- 
eral ccononiic 
society,  the 
dotted  line  EF 
may  be  taken  as  expressing  the  increase  in  the  part 
of  the  labor  and  capital  of  the  country  devoted  to 
manufacturing  as  population  becomes  (h-iiser,  APJ 
measures  the  projxjrtionate  number  of  |)ersons  en- 
gaged in  manufacturing  in  the  region  of  sparsest 
population,  and  DF  measures  the  comparative  num- 
br  in  the  region  most  densely  peopled. 

A(t   ana   DH  represent   the  numbers  engaged   in 

i^^riculture  in  the  two  regions,  and  the  descent  of 

lie    aif    GH   represents  the   predominanc(^  of  agri- 

•li;  -n    in  the  sparsely  populated  part  and  the  sub- 

riuuiuon  of  it  in  the  pan  that  is  den.seiy  populated. 

-f   V    assume  that  capital  in  the  different  types  of 

!:_.:   .yment  varies  as  does  labor,  the  descent  of  this 

^ns^  -nward  the  right  means  a  decline  in  the  fraction 

■t  ziiv  v\iiule  force  of  labor  and  of  the  whole  fund 


')90 


ESSENTIALS   OF   ECONOMIC  THEORY 


I 
1; 


I 


of  capital  devoted  to  cultivating  the  soil ;  while  the 
upward  trend  of  EF  means  the  enlarging  propor- 
tion of  labor  and  capital  devoted  to  manufacturing 
as  we  1  ass  from  a  region  of  s{)arse  population  to 
regions  more  and  more  crovvtleil.  The  wavy  char- 
acter of  the  two  dotted  lin(>s  is  designed  to  express 
the  fact  that  iocai  conditions  other  than  mere  den- 
sity of  population  favor  the  one  type  of  occupation 
rather  than  the  otlier;  and  moreover,  nothing  in 
the  figure  is  intended  to  mean  that  the  increase 
in  manufacturing  and  the  'comparative  decrease  in 
tillage  fiom  the  left  of  the  diagram  to  the  right  are 
in  any  exact  numerical  proportion  to  the  increase 
in  the  density  of  population.  The  figure  as  a  whole 
rudely  represents  the  fact  that  an  approximation 
to  the  static  distribution  of  population  insures  an 
approximation  to  a  static  apportionment  of  occu- 
pations within  the  il(>scribed  area  and  indicates 
the  general  nature  of  tliat  apportionment. 

How  Cost  of  Production  and  Cost  of  Acquisition  are 
Equalized.  —  The  costs  of  moving  goods  from  place 
to  place— including  in  these  costs  commercial  charges 
and  duties  imposed  by  governments  —  are  the  cause 
of  most  of  the  manufacturing  that  is  done  in  the  region 
represente.1  by  the  left  sitle  of  the  diagram,  except 
the  production  of  such  articles  for  immediate  or  local 
consumption  as  are  necessarily  made  at  or  near  the 
places  where  they  are  used.*    Tailoring,  blacksmith- 

'  There  can  be  no  large  area  from  which  manufacturing 
is  excluded.  The  rural  hamlet  has  its  blacksmith,  wheel- 
wright, and  carpenter,  its  sawmills  and  gristmills;  and 
manufacturers  of  sashes,  doors,  furniture  and  many  imple- 
ments abound  where  agriculture  is  the  .reneral  industry. 
Special  advantages  for  production  insure  the  introdi  ion 
of  other  industries,  and  the  advantages  of  being  near  to  cus- 


■  ■  '-■-»-■■■  i  -.-   *yr> 


THE   UMITS   OF   AN   ECONOMIC   SOCIETY 


223 


i   I-" 


mg,  carpentering,  general  repairing,  etc.,  would 
always  be  done  in  that  region,  but  many  kinds  of 
staple  goods  capable  of  being  transported  would,  in 
the  absence  of  duties  on  imports,  be  made  chiefly 
in  the  region  of  dense  population  and  cheap  labor. 

The  general  rule  for  determining  whether  a  branch 
of  manufacturing  can  survive  in  the  area  of  abundant 
land  and  well-paid  labor  is  as  follows:  it  can  do  so 
if  the  cost  of  making  the  article  which  this  branch  of 
business  is  devoted  to  producing  is  as  low  as  the  cost 
of  acquiring  it  by  exchange.  The  cost  may  in  both 
cases  be  reduced  to  bare  labor  and  the  rule  will  then 
stand  thus:  if  ten  days'  labor  will  make  the  article 
and  if  nine  will  make  something  that  can  be  exchanged 
for  it  —  i.e.  if  all  the  costs  of  the  exchange  can  be 
covered  and  the  thing  can  be  brought  from  abroad 
for  a  total  expenditure  of  nine  days'  labor  instead  of 
ten  — the  manufacturing  of  that  article  will  not  sur- 
vive. In  a  region  of  abundant  land  and  well-paid 
labor  it  is  chiefly  the  tolls  which  governments  exact 
which  make  it  as  costly  an  operation  to  get  the  man- 
ufactured products  by  producing  other  things  to  bar- 
ter for  them  as  it  is  to  make  them  directly.  Density 
of  population,  overworking  of  land,  meagerness  of 
returns  to  agricultural  labor  —  these  are  the  condi- 
tions that  primarily  fix  the  habitat  of  most  kinds  of 
manufacturing.     In  the  case  of  particular  products 

toiners  is  onough  to  iiuiintain  many  of  thom.  Hcimiring 
must,  of  courso,  be  dnno  evcrywhcro,  and  in  maiiiiif,'  s(inie 
articles  for  local  us.>  it  is  best  that  the  artisan  siiould  be 
where  the  customer  can  always  reach  him,  A  large  cost  of 
transportation  favors  local  industries,  a  high  degree  of  prod- 
uctivity in  agriculture  has  an  unfavorable  influence,  and  a 
protective  tariff  on  manufactures  reduces  Itie  returns  from 
agriculture  and  favors  niunufucturing  indusiiy. 


&%| 


f        . 


>:"?r:m^ 


224 


ESSENTIALS   OF   ECONOMIC   THEORY 


these  influences  may  be  overcome  by  the  pr3sence 
in  limited  parts  of  the  sparsely  settled  area  of  excep- 
tional natural  advantages  for  production.  Natural 
gas,  special  ores,  particular  kinds  of  lumber,  etc.,  may 
draw  some  branches  of  manufacturing  to  the  region 
of  fertile  land  and  high  wages ;  but  as  the  compari- 
son which  we  are  making  is  the  most  general  one 
which  it  is  possible  to  make  we  are  safe  in  our  asser- 
tion that,  in  the  main,  manufacturing  processes  tend, 
in  the  absence  of  exceptional  influences,  to  con- 
centrate themselves  in  the  region  of  dense  population 
and  of  meager  earning  power  of  labor. 

The  Approximate  Static  Adjustment  of  Prices.  — 
In  the  main,  and  with  tariffs  as  they  are,  the  price 
of  raw  products  is  somewhat  lower  at  the  left  of  the 
figure,  while  that  of  highly  wrought  merchandise  is 
markedly  lower  at  the  right  of  it ;  and  with  the  com- 
parative density  of  population  as  it  is  and  with  no 
change  of  commercial  policy  on  the  part  of  govern- 
ments, this  condition  may  be  expected  to  continue. 
It  is  an  approximately  static  adjustment  of  prices. 
Purchasing  manufactured  goods  in  Europe  will 
long  be  profitable  if  they  can  be  passed  duty  free 
through  the  customhouse,  while  food  will  be  some- 
what  cheaper  in  America. 

Static  Wages  and  Interest.  —  As  has  been  said,  the 
wages  of  labor  are  comparatively  low  at  the  right  and 
high  at  the  left  of  the  figure,  while  interest  varies  in 
the  two  regions  in  the  same  way.  It  is  lower  in  the 
crowded  area.  This  is  not  because  of  the  presence  of 
many  men,  for  this  influence  alone  would  tend  to 
sustain  the  productive  power  of  capital  and  the  con- 
sequent rate  of  interest,  and  in  fact  the  interest  on 
capital  in  Europe  would  be  lower  than  it  is  if  the 


^ -^gg^f^t;;  :-:W!p^^W^^'^ 


^-i 


THE    UMIT8   OF   AN    ECONOMIC   SOCIETY 


225 


population  there  were  sparser.     The  rate  which  pre-^ 
vails  is  fixed  by  the  productive  power  of  a  very  large  • 
fund  of  artificial  capital  utilized  by  a  large  popula-  ■ 
tion  meagerly  supplied  with  land.    This  last  item  is 
decisive  in  the  case  and  is  a  primary  cause  of  low 
interest.    The  full  statement  of  these  facts,  made  in 
graphic  form,  shows  an  ascending  line  of  density  of 
population,  as  we  proceed  from  left  to  right,  an 


ascending  line  of  price  for  raw  produce,  a  descending 
line  of  price  for  highly  wrought  merchandise,  and 
descending  lines  for  wages  and  interest.  All  these 
lines  represent  the  facts  in  a  broadly  general  way. 
They  deal  with  averages  and  not  with  particular 
rates.  The  labor  whose  earning  power  descends 
along  the  line  numbered  5  is  of  many  kinds,  and  the 
produce  of  which  the  average  values  vary  along  the 
lines  numbered  2  and  4  is  of  many  varieties.  The 
rate  of  ascent  or  descent  of  the  lines  has  no  especial 
quantitative  significance,  and  it  is  therefore  not  im- 
plied in  the  figure  that  wages  decline  more  rapidly 
than  the  other  factors.  Moreover,  it  is  such  large 
areas  .as  tlinso  of  England,  Germany,  France,  or  the 
Mississippi   Valley,  including  both  cities  and  rural 


^M 


i'L 


r^^jv^^^n^j^^^^ 


226 


E£,8ENT1ALS  OP   ECONOMIC  THEORY 


u 


lands,  that  we  have  in  mind  when  we  speak  of  the 
density  of  population  as  ascending  along  the  line 
numljered  1.  Anywhere  we  expect  to  find  cities 
containing  more  persons  to  the  acre  than  rural  dis- 
tricts. The  purpose  of  the  figure  is  to  enable  us  to 
take  in  at  a  glance  five  different  adjustments  that  in 
the  main  are  to  be  regarded  as  approximately  static 
within  the  great  region  described  as  the  economic 
center  of  the  world.* 
Slow  Change  of  the  Foregoing  Adjustments.  —  The 

line  which  repre- 
sents the  com- 
parative density 
of  population  is 
of  course  slowly 
changing  position 
as  migration  goes 
on  from  the  older 
centers  of  popula- 
tion to  more  newly  occupied  regions.  If  the  present 
distribution  of  population  be  represented  by  the  line 
numbered  1,  the  distribution  a  hundred  years  hence 
may  be  represented  by  the  dotted  line  numbered  2, 
and  that  which  will  exist  after  five  hundred  years 
shall  have  passed  may  be  represented  by  the  dotted 
line  numbered  3.  Even  within  the  economic  center 
the  comparative  density  of  population  in  different 
divisions  is  therefore  not  to  be  treated  as  strictly 

'The  law  of  the  distribution  of  occupations  over  the  area 
represented  by  the  diagram  would,  if  it  were  more  fully  de- 
veloped, present  an  amplification  of  the  law  of  International 
Trade  slated  in  Mill's  "  Political  Economy,"  according  to  which 
countries  naturally  produce,  not  only  the  things  for  the  mak- 
mg  of  wliifh  they  have  tlu;  grcatesi  absolufe  adviuitage  but 
those  for  which  they  have  the  greatest  relative  advantage. 


^p^:f 


m^mam^mki^wm^^ 


THE   UMITS   OF   AN   ECONOMIC   SOCIETY         227 

permanent,  and  it  is  not  to  be  treated  as  in  any  sense 
permanent  wlien  we  are  forecasting  effects  that  will 
be  realized  several  centuries  hence.  For  a  problem 
involving  a  score  or  two  of  years  the  general  conditions 
we  have  described  may  be  treated  as,  in  the  main, 
abiding.' 

'  The  reason  for  confining  attention  to  the  central  zone  is 
partly,  as  wc  have  stated,  because  here  only  do  we  get  a  quick 
response  to  an  economic  influence.  Overproduction  (jf  any 
article  quickly  lowers  the  value  (jf  it  throughout  the  area, 
and  a  mass  of  unemployed  laborers  aflfects  wages  throughout 
the  area  more  speedily  than  it  does  in  the  great  environing 
zone. 

This,  however,  is  only  one  reason  for  this  limitation  of  the 
scope  of  our  immediate  study.  A  serious  fact  is  that,  if  we 
include  the  entire  world,  we  cannot  establish,  in  the  way  we 
have  proposed,  the  natural  standards  toward  which  values, 
wages,  and  interest  are  tending.  It  will  be  recalled  that  in 
the  static  division  of  this  treati.se  we  have  attained  a  "natural" 
standard  of  wages  by  assuming  that  all  dynamic  changes 
were  to  cease  and  that  labor  and  capital  were  to  move  to  and 
fro  in  the  system  of  indu.strial  groups  till  each  of  these  agents 
produced  as  much  in  one  subgroup  as  in  another.  A  com- 
putation of  this  kind  might,  within  a  limited  area,  be  made 
periodically,  say  once  in  ten  years,  and  if  this  were  done  it 
would  give  a  .scries  of  static  standards  of  wages.  Now  these 
standards  become  higher  as  time  advances.  The  static  rate 
of  pay  for  labor  is,  as  a  rule,  higher  at  any  one  date  than  was 
the  .standard  for  a  date  ten  years  earlier,  and  lower  than  will 
l)p  that  for  a  date  ten  years  later.  The  normal  rate  of  pay 
about   which   actual   wages   fluctuate   is   a   rising   one. 

Now,  if  we  introduce  in  imagination  an  absolutely  static 
state  for  the  world  at  large,  wo  shall  have  to  assume  that 
growth  of  the  general  population  ai'd  increase  of  the  aggre- 
gate capital  both  cease,  and  that  inventions  and  new  coor- 
dinations are  no  longer  made.  We  must  then  wait  long 
enough  to  allow  .static  distribution  of  indu.stries  to  be  made 
over  the  whole  wtirld  and  to  let  each  industry  find  its  absolute 
habitat.  This  would  involve  causing  methods  of  producing 
any  commodity  to  be  unified  the  world  over.  Hand  labor 
in  the  Orient  would  have  to  give  wa^        machine  production. 


•li 


..      * 


i 

if 


11 


:kM£.i,^-j^^f^^mi::mi 


228 


ESSENTIALS   OF   ECONOMIC  THEORY 


as  it  has  done  in  Western  lands.  For  a  strictly  static  ad- 
justment indeed  even  the  density  of  population  in  the  different 
sections  would  have  to  be  brought  to  a  virtual  equality. 
While  this  nearly  interminable  process  was  going  on,  it  would 
be  needful  that  such  dynamic  changes  as  inventions  and 
disc  ■  "s  bring  in  their  train  should  bo  absolutijly  precluded. 
Stop  maKing  new  kinds  of  machinery  and  wait  for  centuries 
to  allow  a  static  adjustment  to  be  made  over  the  whole  earth 
—  such  would  be  the  order. 

Now,  such  a  test  as  this  would  show  falling  wages  in  the 
more  favored  parts  of  the  earth,  whereas  the  facts  show  rising 
wages.  The  influx  of  population  from  the  East,  unrelieved 
by  a  corresponding  influx  of  new  capital  and  by  more  fruitful 
methods  of  production,  would  cause  the  earnings  of  an  Ameri- 
can laborer  to  fall,  and  we  should,  on  the  basis  of  such  a  test, 
conclude  that  his  wages  in  the  long  run  are  destined  to  be- 
come lower  in  consequence  of  the  movement  of  tlie  vast 
populations  that  now  congest  great  A.siatic  countries.  We 
should  have  vitiated  the  problem  by  holding  the  growth  of 
capital  and  the  progress  of  invention  in  abeyance.  This 
may  be  done  within  a  limited  area  without  giving  a  false 
result,  because  there  adjustments  are  more  rapid,  and  wait- 
ing for  them  does  not  mvolve  the  long-continued  paralysis 
of  the  powers  that  make  for  greater  wealth  for  laboring  hu- 
manity. Apply  the  test  of  the  static  state  to  the  economic 
center,  and  it  will  give  a  generally  true  result ;  but  it  wUl 
give  a  false  one  if  it  be  applied  to  the  world  as  a  whole.  The 
merely  static  adjustment  of  the  world  would  take  more  cen- 
turies than  we  care  to  reckon,  and  no  truth  that  we  are  seek- 
ing is  revealed  by  assuming  that  for  such  a  period  the  forces 
of  progress  are  brought  to  a  standstill. 


t% 


i 


CHAPTER  XIV 

EFFECTS  OF  DYNAMIC  INFLUENCES  WITHIN  THE  LIMITED 
ECONOMIC   SOCIETY 

How  the  General  Unification  of  Methods  of  Produc- 
tion  Calls  at  First  for  an  Increased  Exportation  of 
Capital  from  the  Central  Area  and  Checks  the  Immigra- 
tion of  Laborers.  —  A  study  of  the  causps  of  the 
inforcKanges  which  take  place  between  the  economic 
center  and  its  environment  shows  that  the  move- 
ment of  goods,  the  diffusion  of  modern  methods  of 
making  goods,  and   the  movements  of  capital  and 
labor  across  the  border  of  the  economic  society  we  are 
studying  are  interdependent.     Opening  a  field  for  a 
profitable   export  trade    increases   the   productivity 
of    labor  at  home    and   tends   to   attract   immigra- 
tion.    On   the  other   hand,  establishing  in  the  outer 
zone  a  market  for  the  products  of  the  center  pre- 
pares the  way  for  introducing  modern  manufactures 
into    the    more  densely  peopled   parts  of  the  outer 
area.    The  company  that   sells  cotton  goods  to  the 
Chinese  or  the  Hindoos  will  find  that  there  is  more 
to  be  made  by  utilizing  the  cheap  labor  of  those 
peoples  for  making  the  goods  by  efficient  machinery. 
Commerce  tends  to  diffuse  a  knowledge  of  the  most 
economical  processes  of  manufacturing,  and  this  inter- 
poses a  certain  stay  on  migrations  of  labor  toward 
the  center.     It  will  in  time  help  to  retain  Chinamen 
in  China  and  Hindoos  in  India.     It  does,  however, 
cause  a  movement  of  capital  from  the  center  outwani, 

229 


I 


I  I 


fe, 


230 


ESSENTIALS  OF   ECONOMIC  THEORY 


followed  in  time  by  a  creation  of  wealth  in  the 
outer  zone  for  proprietors  residing  within  the  center. 
The  Englishman  draws  dividends  from  investments 
in  many  lands  not  within  the  field  covered  by  the 
present  studies.  In  so  far  as  he  reinvests  them,  as 
capital,  in  those  lands,  they  supply  a  need  that, 
without  them,  would  have  to  be  supplied  by  a  new 
exportation  of  capital  from  the  home  country,  and 
they  therefore  tend  to  check  such  exportation.  In 
so  far  as  the  dividends  are  brought  home  they 
directly  neutralize  a  certain  amount  of  exportation 
of  capital. 

Effects  experienced  mthin  Economic  Society  from 
Interchanges  with  the  Environing  Area.  —  The  intro- 
duction of  improved  methods  of  production  within 
the  central  area  usually  calls  for  an  expenditure  of 
capital  there,  and  this  is  largely  furnished  from  the 
net  profits  from  previous  economies  in  production, 
and  will,  in  its  turn,  furnish  net  profits  that  will  con- 
vert themselves  into  the  capital  needed  for  applying 
future  inventions.  The  study  of  the  causes  of  an 
increase  of  capital,  as  well  as  of  each  of  the  generic 
changes  that  are  going  on  within  the  center  we  defer 
for  later  chapters;  but  at  present  we  need  to  know 
that  the  changes  going  on  within  what  we  define  as 
economic  society  are  affected  by  the  intercourse 
which  that  society  maintains  with  its  environment. 
Immigration  across  the  outer  boundary  of  the  gen- 
eral division  enhances  the  rapidity  of  growth  of  the 
population  within  it,  while  emigration  roduces  it. 
Exporting  capital  in  itself  reduces  the  rate  of  accu- 
mulation at  home,  and  importing  increases  it.  Intro- 
ducing into  foreign  regions  economical  methods  in  use 
at  home,  modifies  the  trade  which  goes  on  between 


EFFECTS    OF    DYNAMIC    INFLUENCES 


231 


the  great  areas,  and  there  is  a  perpetual  rivalry  be- 
tween the  direct  and  the  indirect  process  of  obtaining 
goods  at  home.  When  a  unit  of  labor  can  directly 
make  more  of  A'"  than  it  can  procure  by  making  A 
and  exchanging  it  abroad  for  A'" ,  the  manufacture 
of  A'"  is  legitimate  and  profitable,  but  when  the  unit 
of  labor  can  procure  more  of  A'"  by  the  indirect 
process  in  which  an  exchange  with  a  foreign  region 
intervenes,  static  law  requires  that  this  indirect  pro- 
cess be  resorted  to.  We  should  make  A  and  buy 
A'"  in  order  to  get  the  most  of  the  latter  com- 
modity. This  is  the  essence  of  the  time-honored 
argument  for  freedom  of  trade,  but  the  conclusion  to 
which  it  leads  is  modified  by  a  consideration  of 
further  dynamic  influences  which  will,  in  due  time, 
be  presented. 

How  we  may  get  Valid  Results  by  Studying  only  a 
Part  of  the  World.  —  It  is  entirely  possible  to  study  by 
themselves  the  activities  of  such  a  part  of  the  world, 
and  we  will  therefore  draw  a  line  of  demarcation  about 
the  countries  which  constitute  the  economic  center 
of  it,  and  thus  include  an  area  within  which  economic 
causes  produce  speedy  effects.  Each  part  of  this  area 
quickly  responds  to  influences  that  originate  in  any 
other  part.  If  the  steel  mills  in  America  make  rad- 
ical improvements  in  their  machinery,  this  change 
should,  in  the  absence  of  a  strong  monopoly,  affect  the 
price  of  rails  in  England,  Germany,  etc.  Within  the 
central  region  wages  and  interest  tend  toward  uni- 
formity, though,  as  we  have  seen,  they  do  not  attain 
it.  Across  the  boundary  which  separates  this  center 
from  the  outer  zone,  economic  influences  act  in  a  more 
feeble  way  and  are  unable  to  bring  rates  of  wages  and 
interest  even  to  an  approximate  equality.    Western 


5« 


t2::tA-ivj^'iiJ:':^m-^^^ 


232 


ESSENTIALS   OF    ECONOMIC   THEORY 


Europe,  America,  and  whatever  regions  are  in  very 
close  connection  with  them,  we  treat  as  a  society, 
with  the  remainder  of  the  world  as  its  environment. 
This  center  trades  with  the  environing  region,  sends 
some  capital  and  labor  thither,  and  draws  some  of 
each  thence  to  the  home  countries.     Willingly  or 
otherwise,  it  instructs  the  people  of  the  outer  region 
in  modern  methods  of  industry,  and  thus  causes  what 
we  may  regard  as  a  slow  annexation  of  a  part  of  the 
outer  zone  to  the  economic  center  and  a  modification 
of  the  character  of  industries  at  home  and  abroad. 
(The  principal  movement  of  labor  is  in  an  inward 
direction,  and  from  our  point  of  view  it  is  immigra- 
tion not  into  one  country  merely  but  into  all  eco- 
nomic   society.      The    predominant    movement    of 
capital  has  been  outward. 

Mode  of  Studying  Interchanges  between  Center  and 
Environing  Zone.  —  All  these  movements  have  to  be 
recognized  in  a  study  of  the  economic  life  of  the  central 
society.  How,  for  example,  is  commerce  with  unde- 
veloped regions  to  be  regarded  if  we  have  the  center 
only  in  view?  It  is  simply  one  of  two  possible  ways 
of  getting  goods.  The  people  of  the  center  can  make 
a  commodity  that  they  use,  or  they  can  make  some- 
thing to  send  into  the  outlying  countries  in  exchange 
for  it.  In  the  latter  case  they  acquire  it  indirectly 
rather  than  directly,  but  they  acquire  it  by  their  own 
industry  in  the  one  case  as  well  as  in  the  other. 

Natural  Selection  of  Modes  of  procuring  Usqble 
Goods.  — Under  natural  influences,  as  we  have  said, 
men  select  the  most  economical  way  to  get  what  they 
use,  or  —  what  is  the  same  thing  —  they  select  the 
mode  of  utilizing  their  own  labor  and  capital  that 
will  give  them  the  largest  return  in  goods.    There  is 


■^:mM^'^lit^y.  -f- 


^  li 


EFFECTS   OF    DYNAMIC   INFLUENCES 


233 


competition  between  different  methods  of  directly 
making  goods,  and  the  best  method  survives.  The 
man  with  a  good  machine  undersells  the  man  with  a 
poor  one;  this  latter  producer  must  improve  his 
equipment,  or  fail,  and  appliances  thus  tend  toward 
a  maximum  of  efficiency.  In  like  manner  there  is 
competition  between  the  direct  and  the  indirect  mode 
of  obtaining  goods.  The  man  who,  by  using  a  certain 
amount  of  labor  for  a  week  in  making  steel  for  exporta- 
tion, can  obtain  in  exchange  fifteen  yards  of  silk,  can 
undersell  and  drive  from  the  field  the  man  who,  by 
using  the  same  amount  of  labor  for  a  week  in  silk 
making,  can  produce  ten  yards  of  silk.  The  importer 
naturally  supplants  the  manufacturer  when,  by  barter- 
ing with  foreigners  the  product  of  a  given  amount  of 
labor,  he  can  get  from  them  more  than  can  be  pro- 
duced at  home  by  the  same  amount  of  labor.  The 
manufacturers  naturally  survive  when  direct  produc- 
tion gives  the  larger  returns.  In  our  studies  of  the 
economy  of  the  society  that  is  most  advanced  and 
central,  we  may  treat  whatever  is  imported  as,  in  an 
indirect  way,  produced.  In  a  sense  the  activities 
of  that  society  are  nearly  self-contained  since,  by  the 
direct  or  the  indirect  method,  the  people  produce 
within  their  own  boundaries  the  most  of  what  they 
consume.  In  doing  so  thoy  naturally  use  with  a 
maximum  of  economy  the  forces  at  tl-cir  command, 
and  resort  to  traffic  when  that  is  profitable. 

Mode  of  Treating  the  Exportation  of  Capital.  — 
Capital  is  moving  across  the  boundary  mainly  in  an 
outward  direction.  This  fact,  standing  alone,  would 
be  equivalent  to  a  mere  retarding  nf  the  rate  nf 
increase  of  capital  within  the  economic  center;  but 
the  exported  capital,  as  it  is  used  outside  of  the 


■  ~-  JlJ     ...  ^^ 


234 


ESSENTIALS   OF    ECONOMIC   THKORV 


I    nl 


exporting  society,  produces  an   income  for  owners 
living  within  it.    The  income  comoH  in  kind,  Mnce  it 
takes  the  form  of  goods  wlii.li  are  an  additinri  to 
tho8c  imported  in  the  course  of  ordinary  exchanges. 
This  tril)ute  paid  to  capitahsts  within  the  industrial 
center  comes  chiefly  in  the  form  of  consumers'  goods, 
the  receiving  of  which  docs  not  entail  the  producing 
of  .something  to  send  away  in  exchange  for  them.    The 
material   ageiit   which   creates   the   imported   goods 
remains  outside  of  the  society,  and  sends  its  product 
into  the  society  with  no  offset.     The  fact  of  such  an 
income  coming  from  beyond  the  pale  of  an  economic 
society  i:.as  compelled  us  to  qualify  the  statement  that 
the  economy  of  the  society  is  self-contained,  for  there 
is  a  small  part  of  its  income  which  is  not  created  within 
its  borders.    This  comes  about  by  the  exportation  of 
capital  and  the  importation  of  some  of  its  products. 
Effects  of  Drawing  Interest  from  Investments  beyond 
tl\£  Social  Boundary.  —  Not  all  of  these  are  consumers' 
goods.    Some  capital  goods  are  imported  and,  more- 
over, many  consumers'  goods  are  passed  over  to  the 
group    called  HH'"  in  our  table,  — the  one   that 
makes  active  instruments  of  production,  — and  in  this 
indirect  way  the  earnings  of  capital  invested  abroad 
add  to  the  amount  of  capital  at  home.    In  the  long 
run  the  exportation  of  funds  for  permanent  invest- 
ment may,  by  its  other  and  more  indirect  effects, 
increase  the  supply  of  them  at  home.    The  literal 
fact  in  eacli  year  is  that  what  is  exported  is  itself  a 
reduction  of  the  amount  that  would  otherwise  be 
added  to  the  home  supply,  but  that  the  income  accru- 
ing from  what  has  been  exported  in  earlier  years  makes 
fin  addition  to  what  is  in  this  year  accumulated  at 
home.    Primarily,  the  exportation  of  capital  is  to 


EFFECTS   OF    DYNAMf    INFLUENCES 


235 


be  treated  a.*-  causing  a  motlification  of  the  rate  of 
accumulation  of  capital  ami,  in  a  long  term  of  years, 
an  increase  ot  tlx'  rate. 

Movement-^  of  Labor.  —  liaho-ors  cross  the  boundary 
in  both  directions,  but  induconents  favor  the  inward 
movement.  In  the  absence  .<f  positive  obstacle-i 
the  denser  populations  of  Asia  could  overflow  into 
America  with  a  startling  rapidity.  Such  a  move- 
ment, on  whatever  scai(>  it  occurs,  is  to  .)e  treated 
as  causing  an  acceleration  of  the  rate  of  increase  of 
the  population  within  the  center.  Wliatever  results 
arise  from  growth  of  population  within  are  empha- 
sized by  immigration. 

The  Assimilation  of  Economic  Methods  and  Forms 
of  Organization.  —  People  without  the  center  are 
borrowing  from  it  the  newer  and  more  eOicient 
methods  of  production.  Already  Asiatics  are  mak- 
ing some  things  by  machinery,  and  when  they  shall 
do  it  more  generally  there  will  take  place  changes  that 
will  be  very  revolutionary  in  their  own  economic 
life  and  will  react  on  the  life  of  the  center  itself. 
Learning  to  use  a  thousand  and  one  machines  will 
rend  China  and  disturb  Europe  and  America.  In 
general,  better  appliances  and  a  more  efficient  organi- 
zation will  make  it  possible  'or  Asia  to  create  for 
herself,  and  ultimately  export  much  that  she  now 
imports,  and  this  will  react  on  the  character  of  the 
industries  of  .\inerioa  and  Europe.  We  shall  some- 
what modify  our  industries  in  order  to  get  the  benefit 
of  new  openings  for  commerce,  and  some  of  the  things 
which  we  now  ('irectly  produce  we  may  find  it  more 
profitable  to  eot  by  exchange,  which  is  indirect  pro- 
duction. On  the  other  hand,  some  foreign  products 
which  wc  now  get  with  great  economy  of  labor,  be- 


t       I 

HI 


236 


ESSENTIALS   OF   ECONOMIC  THEORY 


cause  the  goods  we  exchange  for  them  are  scarce  and 
dear  in  the  countries  that  receive  them,  we  shall  get 
on  less  favorable  terms,  because  the  goods  we  now 
send  to  the  foreign  lands  will  have  become  there  more 
abundant  and  cheap.     In  general,  we  must  regard 
/  the  opening  of  a  profitable  avenue  tor  trade  as  we 
I  should  the  invention  of  a  new  machine,  the  discovery 
/   of  a  better  electrical  transmitter,  or  the  utilizing  of 
I    a  cheaper  motive  power.     It  gives  us  more  goods  as 
y  the  fruit  of  a  given  expenditure  of  labor  and  capital 
:  and  affords  a  profit  which,  as  we  shall  see,  comes 
first  to  entrepreneurs  and  later  to  laborers  and  capital- 
ists within  the  pale.     Ultimately,  those  living  beyond 
the  pale  will  get  a  share  of  thi.s  gain. 

Summary  of  Facts  cnnceminq  the  Economic  Center. 
—  We  may,  then,  regarfl  a  certain  limited  part  of  the 
world  .as  a  society  in  itself.  It  is  modified  by  its 
environment,  but,  in  an  important  sense,  it  has  a 
self-contained  life.  The  economic  changes  which 
go  on  within  it  can  be  grouped  under  the  five  generic 
heads :  increase  in  the  amount  of  labor,  increase  in 
the  quantity  of  capital,  improvement  of  method, 
improvement  in  organization,  and  changes  in  the 
wants  of  the  individual  consumers. 

The  Geographical  Boundaries  of  Society  not  Fixed.  — 
The  boundaries  of  this  central  area  are  not  fixed. 
As  relations  b(>tween  the  center  and  the  part  of  the 
outor  zone  which  is  nearest  to  it  become  more  and 
more  intimate,  the  adjacent  region  takes  on  the  char- 
acter of  the  center.  It  is,  in  an  economic  way,  as- 
similated to  it;  and  in  this  way  the  center  may  lie 
regarded  as  annexing  to  itself  bolt  after  belt  of  the 
environing  world.  Ultimately  it  will  doubiKvss  annex 
the  whole  of  it;  and  for  this  reason,  even  though  we 


EFFECTS  OF   DYNAMIC   INFLUENCES 


237 


confine  our  studies  to  the  center,  we  shall  establish 
a  system  of  economic  laws  which  will  apply,  in  the 
end,  to  all  the  world.  This  indeed  is  not  the  only 
way  in  which  the  economic  life  of  the  outer  area 
comes  into  the  economist's  purview,  for  he  can  study 
it  for  itself.  This  zone  has  its  peculiar  life,  which  is 
a  distant  reflection  of  the  life  of  the  center.  It  is  a 
type  of  economic  activity  in  which  all  th(>  primary 
forces  work,  but  in  which  friction  abounds  and  adjust- 
ments are  made  with  extreme  slowness.  For  the 
present,  what  interests  us  is  the  life  of  the  center  it.self, 
and  in  studying  this  we  take  account  of  the  influence 
of  the  environment.  The  elTects  of  these  influences 
are  first  seen  in  changes  in  the  rate  at  which  the  five 
general  dynamic  mo\-ements  go  on  within  the  center. 
The  '3;rand  resultant  is  more  rapid  progress  within  the 
cen 

What  is  invoh'cd  in  a  Full  Study  of  the  Relative 
Density  of  Populations.  —  A  full  tn^atment  of  the 
subject  of  the  comparative  density  of  poi)ulation  in 
different  places  would  include  an  extended  study  of 
the  kinds  of  industry  which  find  their  natural  homes 
m  densely  peopled  countries  and  of  those  which 
flourish  in  sparsely  peopled  ones,  and  a  much  more 
detailed  tracing  than  it  is  possible  here  to  undertake 
of  those  changes  in  the  character  of  industries  every- 
where which  result  from  a  leveling  out  of  differences 
in  population.  Clearly,  if  all  America  were  to  be- 
come as  crowded  with  inhabitants  as  are  Holland  and 
Belgium  we  should  develop  industries  of  a  ditTerent 
type  from  those  that  we  now  have,  and  the  change 
would  be  in  the  direction  of  producing  relatively  more 
form  utilities  and  relatively  less  of  the  elementary 
utilities.     Labor  and  capital  would  move  from  the 


i^ 


If!: 


w  * 

I 


if2.^MW 


238 


ESSENTIALS   OP   ECONOMIC   THEORY 


subgroups  which  in  our  table  we  have  called  A,  B, 
and  C  toward  A'",  B'",  and  C".  We  should  spend 
more  of  our  energy  in  making  finished  goo()s  and  less 
in  getting  raw  materials.  I  shall  note  in  a  very  gen- 
eral way  the  changes  in  social  industry  caused  by  in- 
crease of  population  without  looking  forward  to  that 
remote  time  when  the  density  of  population  shall  be 
equalized. 

Why  an  Approximately  Static  Adjustment  of  In- 
dmtries   within   the   Central   Area    permits    Unequal 
Density  of  Population  in  Different  Parts  of  It.  —  We 
exclude  from  view  the  ultimate  static  adjustment  of 
the  whole  world,  and  content  ourselves  with  an  ap- 
proximate  adjustment   within  society   as   we  have 
defined  it.     Even  within  this  limit  there  are  inequal- 
ities in  the  density  of  population  which  it  woukl  re- 
quire a  very  long  time  to  remove,  and  a  perfectly 
static  state  cannot  be  reached  till  they  are  leveled 
out.    The  seh-ction  of  industries  in  Texas  and  in 
Belgium  cannot  be,  in  the  ultimate  sense,  natural  till 
population  in  these  two  regio.is  is  so  adjusteil  that 
there  is  no  longer  an  economic  motive  for  migrating 
from  the  one  U  the  other.     If,  in  order  to  determine 
what  an  absolutely  .static  condition  for  the  central 
society  would  be,  we  were  to  apply  the  rule  of  imag- 
ining all  new  dynamic  influences  precluded  and  of 
allowing  time  enough  to  elapse  to  bring  aljout  a 
normal    apportionment    of   population    within    that 
limited  area,  we  should  encounter  a  measure  of  the 
same  difficulty  which  confronted  us  when  we  proposed 
to  attain  a  similar  static  state  for  the  entire  world, 
though  the  trouble  would  ho  les.s  seritvis  in  degree. 
In  waiting  Innir  oTiouirh  for  pnpnlatinn  in  {jir^trilnite 
itself  naturally,  we  cut  off  influences  that,  within 


EFFECTS   OF    DYNAMIC    INFLUENCES 


239 


that  period,  will  affect  production  and  distribution  far 
more  than  the  change  in  population  will  affect  them. 
In  so  far  as  Texas  or  any  newly  occupied  region  is 
concerned,  the  changes  thus  precluded  are  those  which 
would  have  tended  to  reverse  the  effect  of  the  redis- 
tribution of  population.  Migrations  from  Belgium 
to  Texas,  if  extensive  and  long  continued,  would 
reduce  the  productive  power  of  labor  in  Texas ;  while 
the  dynamic  changes  which  will  actually  go  on  within 
any  such  period  will  increase  the  productive  power  of 
that  labor,  and  it  is  not  certain  whether  the  one  or 
the  other  influence  will  predominate.  For  the  United 
States  as  a  whole  it  is  probable  that  progress  in  the 
useful  arts  will  more  than  offset  the  influx  of  new 
laborers  and  give  to  wages  a  rising  trend.  If,  how- 
ever, we  establish  the  natural  standard  of  wages 
by  cutting  off  such  progress  and  letting  the  influx 
of  labor  continue,  the  test  would  give  a  standard 
lower  than  the  present  one, — a  false,  as  well  as  a 
discouraging  result.  The  resultant  of  all  the  changes 
we  are  about  to  study  will  probably  give  to  the  future 
pay  of  labor  in  America  a  rising  trend. 

How  IndiLstries  adapt  themselves  to  Unequal 
Density  of  Population.  —  In  view  of  this  fact  it  is 
necessary  to  recognize  a  proximate  rather  than  an 
ultimate  static  state  as  that  toward  which  the  adjust- 
ments now  going  on  are  innnediately  tending.  We 
will  treat  the  unequal  tlensity  of  population  within 
our  economic  society  as  something  which  will  last,  not 
forever,  but  so  long  that  it  will  not  be  removed  or 
appreciably  affected  within  the  period  required  for 
the  other  adjustments  that  we  are  studying.  Given 
n  population  that  is  dense  in  Belgium  and  sparse  in 
Texas,  and  competition  will  cause  the  industries  to 


•■I 


.^M^ 


240 


ESSENTIALS   OF    ECONOMIC   THEORY 


tako  on  the  typos  which  they  would  have  and  retain 
if  that  difference  in  density  were  destined  to  be 
|){>rnianent.  TI»o  type  toward  which  the  economic 
Ufe  of  botlj  rcf^ions  is  tending  is  thus  a  proximate 
ratluT  than  an  uUiniate  one.  Each  region  will,  in 
the  near  future,  be  of  the  type  toward  which  influ- 
ences which  do  not  involve  an  e(|ualization  of  popu- 
lation are  impelling  it. 

D 


We  get  the  true  direc- 
tion of  the  change  that 
is  going  on  in  the  earn- 
ing power  of  lalxtr  and 
in  the  shape  of  the  in- 
dustrial   organism    in 
both  regions  by  recog- 
nizing the  fact  that  the  differences  in  the  density  of 
their  populations  will  continue  through  the  period 
which  we  are  considering. 

If  the  line  BC  represents  the  productive  power  of 
a  unit  of  labor  in  a  region  which  is  sparsely  peopled, 
anil  the  line  fi'C"  represents  the  productive  power  of 
a  unit  of  labor  in  a  densely  peopled  region,  we  may 
assume  that  AC  and  A'C,  which  are  equal  to  each 
other,  represent  the  product  of  a  unit  in  either  locality 
when,  general  progress  being  precluded,  the  differ- 
ence in  the  density  of  population  should  have  been 
leveled  out.  Move  people  at  once  and  in  a  wholesale 
maimer  till  there  is  nothing  to  be  gained  by  further 
moving  them,  —  let  pressure  of  population  on  the 
land  be  fully  ecjualized, — and  you  may  be  supposed 
to  create  a  condition  of  uniform  productive  power  for 
laborers  of  a  given  grade  in  the  entire  region.  The 
horizontal  line  AA\  which  is  everywhere  the  same 
distance  above  the  line  CC,  represents  the  universal 


EFFECTS   OF    DYNAMIC    INFLUENCES 


241 


level  of  the  productivity  of  labor  in  such  a  theoretical 
condition.  The  line  BB'  represents  the  actual  and 
different  levels  of  the  natural  earnings  of  labor  in 
the  different  regions.  Assuming  that  all  other  static 
adjustments  are  nmde,  but  that  the  ecjualization  of 
population  has  not  taken  place,  labor  will  earn  the 
amount  BC  in  one  place  and  the  amount  B'C  in 
another.  Somewhere  it  will  earn  an  amount  repre- 
sented by  the  vertical  line  descending  from  D  and 
somewhere  that  expressed  by  the  line  descending 
from  F,  whih;  there  will  be  places  where  the  earnings 
of  labor  are  measured  by  the  line  descending  from  E, 
which  is  the  amount  that  labor  wouKl  everywhere 
create  and  get  if  the  population  could  be  quickly 
made  normal  in  all  regions.  The  standard  of  wages 
for  the  whole  of  the  great  region,  largely  European 
and  American,  which  constitutes  the  economic  center 
of  the  world,  shows  varying  levels  in  different  coun- 
tries ami  parts  of  countries,  and  the  actual  rates  in 
every  place  fluctuate  about  this  pro.ximately  normal 
standard  for  that  place,  the  standard  rate  in  one 
locality  being  higher  than  that  of  another. 

The  line  A'B'  exceeds  in  length  the  line  AB,  and 
this  expresses  the  fact  that  e(iualizing  the  pressure 
of  population  on  the  land  in  different  regions  adds 
more  to  the  productivity  of  labor  in  the  region  now 
crowded  than  it  deducts  from  that  of  labor  in  regions 
now  sparsely  peopled.  The  overcrowding  docs  greater 
and  greater  harm  the  further  it  is  carried,  and  there- 
fore taking  away  a  surplus  of  people  from  a  region 
whicl:  has  suffered  greatly  from  overcrowding  affords 
a  relief  which  more  than  offsets  what  is  lost  in  other 
}-l:i('es  by  a  moderate  increase  of  population.  M(,re- 
over,  the  fact  has  to  be  recognized  that  at  present 


[1 


I 


I    f 


|i 


t  • 


4  •-,  L 
It  i'P 

9 


r  i 


I  n 

»    ii 


242 


ESSENTIALS   OP   ECONOMIC  THEORY 


there  are  ten  square  miles  of  sparse  population  for 
one  that  is  very  densely  peopled,  and  reducing  all  to 
an  equality  would  add  only  slightly  to  the  number 
of  inhabitants  of  the  regions  that  now  contain  few 
of  them.* 

If  the  line  BB'  represents  the  unequal  level  of 

natural  wages  in 
different  localities, 
on  the  assumption 
that  populations  re- 
main unequal,  the 
undulating  curve 
DD'  which  crosses 
and  recrosses  the 
line  BB'  represents 
actual  local  rates  fluctuating  about  the  standard 
ones. 

How  a  Static  Adjustment  for  the  World  is  a  Dynamic 
Influence  within  a  Limited  Part  of  It.  —  Commodities 
are,  by  traffic,  crossing  the  social  boundary  in  both 
directions,  and  with  the  goods  there  go  and  come 
influences  that  affect  the  economic  life  of  the  central 
society.  Methods  and  modes  of  organizing  business 
are  taught  by  each  region  to  the  other,  though  most 
of  the  teaching  is  done  by  the  people  of  the  center  and 
most  of  the  learning  by  those  of  the  environment. 
All  this  affects  the  center  and  falls  within  our  study. 
It  has  dynamic  effects  within  the  center,  though  it  is 
only  a  part  of  a  static  adjustment  for  the  world  as 
a  whole.    If  the  grand  bank  of  Newfoundland  were 

'  Exceptional  local  conditions  may  make  an  influx  of  popu- 
lation for  a  time  a  cause  of  greater  productivity  rather  than 
of  less.  The  general  and  permanent  efTects  are  otherwise, 
and  it  is  on  these  that  the  present  argument  rests. 


\l 


EFFECTS   OF   DYNAMIC   INFLUENCES  243 

to  subside  to  the  level  of  the  middle  of  the  Atlantic, 
there  would  \w  a  great  rush  of  water  toward  the 
place  that  the  banks  now  occupy,  but  this  would  be 
only  what  is  required  in  bringing  the  general  level 
of  the  sea  to  an  cfiuilibriuni.     It  would  be  essentially 
a  static  phenomenon,  but  for  the  region  of  the  banks 
it  wouKl  be  dynamic  in  the  highest  degree.     A  rush 
of  population  from  China  to  America  would  be  a; 
change  tending  to  establish  an  eciuilibrium  of  popula- 
tion in  the  world,  but  it  would  be  a  startling  bit  of 
dynamics   for  America.    Teaching  the   Chinese   all 
the  mechanical  arts  that  we  know  would  be  creating 
an  equilibrium  of  another  sort,  in  which  methods 
would  be  similar  in  the  two  countries;   but  for  China 
itself  this  acquiring  of  practical  arts  would  be  dynam- 
ics acting  on  a  vast  scale.    What  is  a  static  adjust- 
ment for  the  world  is  a  dynamic  change  for  parts  of 
the  world,  and  all  such  changes  that  can  occur  within 
the  area  of  economic  society  proper  and  within  the 
period  we  can  wisely  include  in  our  study  we  need  to 
take  into  account.    Changes  in  population,  wealth, 
method,  and  organization  must  be  studied,  however 
they  may  originate. 


I 


f   i 

I 

I 

! 

1      : 


}■ 


~  t^i 


CHAPTER  XV 

PERPETUAL  CHANGE  OF  THE  SOCIAL  STRUCTURE 


Perpetml  Change  of  the  Social  Structure.  —  We  con- 
fine ourselves  to  that  economic  society  par  excellence 
which  we  have  called  the  industrial  center  of  the 
world.  In  this  region  economic  influences  are  for- 
ever changing  the  very  structure  of  the  society  itself. 
They  move  labor  from  place  to  place  in  the  system 
and  they  transfer  capital  to  and  fro  in  the  same  way. 
If  we  think  of  our  table  of  groups  and  subgroups  as 
representing  the  whole  of  this  great  industrial  world, 
we  must  think  of  labor  and  capital  as  in  a  perpetual 
flow  from  subgroup  to  subgroup,  making  some  in- 
dustries larger  and  others  smaller  by  reason  of  every 
such  movement.  The  great  force  of  labor  and  the 
fund  of  capital  are  like  restless  seas  whose  currents 
carry  the  water  composing  them  now  hither  and  now 
yon  as  the  direction  and  force  of  the  moving  influ- 
ences change. 

Movements  of  Labor  within  the  Group  System 
caused  by  Increasing  Population.  —  If  the  population 
were  to  increase  while  the  amount  of  capital  and  the 
mode  of  using  it  rema.ned  the  same,  the  effect  would 
be  a  downward  movement  of  both  labor  and  capital 
in  the  series  of  subgroups  by  which  we  represent 
industrial  society.  Labor  and  capital  would  tend  to 
d  .ert  the  subgroups  A'",  B'",  and  C"  in  uur  table 
and  to  move  to  A,  B,  and  G:  — 

244 


PERPETUAL  CHANGE   OP  SOCIAL  STRUCTURE      245 


A'" 

A" 

A' 

A 


B"' 
B" 
B' 
B 


C 

0 


Causes  of  Doumward  Flow  of  Labor  in  the  Group 
System.  —  A  larger  population  means,  of  course,  not 
merely  an  increase  in  the  amount  of  labor  performed, 
but  also  an  increase  in  the  number  of  consumers.' 
It  means  more  mouths  to  feed  and  more  bodies  to 
clothe.    It  entails  also,  according  to  principles  that 
we  have  already  studied,  a  lower  earning  power  and 
a  lower  rate  of  pay  for  labor.    This  means  that  simple 
food,  cheap  clothing,  inexpensive  houses,  furnishings, 
etc.,  constitute  a  larger  element  in  the  consumers' 
wealth  of  society  than  they  have  heretofore  done. 
Society  uses  fewer  luxuries  and  more  necessaries, 
and  the  necessaries  oT life  are  products  in  which  raw 
materials  predominate  and  costly  form  utilities  are 
wanting.    This  makes  a  heavier  draft  upon  the  land 
than  does  the  production  of  highly  wrought  articles 
of  the  same  value. 

Luxurious  articles  are  fashioned  with  a  great 
amount  of  artisan's  or  artist's  labor  and  a  relatively 
small  amount  of  the  labor  of  cultivators  and  miners 
The  subgroups  A,  B,  and  C  are  the  ones  that  furnish 
the  rawest  materials,  and  it  is  they,  therefore,  that 
receive  the  largest  portions  of  the  new  labor  that 
enters  the  field. 

How  Economic  Friction  works  to  the  Disadvantage 
of  Immigrants.  ~  Unless  capital  grows  more  rapidly 
than  population,  there  is  a  certain  friction  to  be  ovrr- 
come  in  obtaining  places  for  new  laborers.  If  they 
come  largely  as  immigrants,  they  are  crowdorl  at  the 
points  of  disembarkation  and  are  then  scattered  over 


I 


246 


ESSENTIALS   OF   ECONOMIC  THEORY 


a  large  territory.  They  may  have  to  Kain  employ- 
ment by  offering  to  entrepreneurs  some  inducement 
to  take  them.  If  capital  has  not  increased,  and  the 
entrepreneurs  are  in  no  special  need  of  new  men,  they 
will  take  them  only  at  a  rate  of  pay  which  is  low 
enough  to  afford  of  itself  a  slight  margin  of  profit. 
If  the  capital  has  already  grown  larger  and  the  new 
men  are  needed,  the  situation  favors  them,  .»nd  their 
pay  is  likely  to  be  as  high  as  it  was  before,  or  higher. 

The  Effect  of  Increasing  Capital.  —  The  growth  of 
capital  has  an  opposite  effect.  It  means  a  lower  rate 
of  interest,  though  it  means  more  interest  in  the 
aggregate,  since  it  insures  a  larger  fund  on  which 
the  interest  is  received.  The  rate  does  not  decline 
as  rapidly  as  the  amount  of  the  fund  increases,  and 
this  insures  a  larger  gross  income  from  the  fund; 
and  it  also  insures  larger  individual  incomes  for  many 
persons.  There  is,  then,  a  large  number  of  people 
who  are  in  a  position  to  make  their  consumption  more 
luxurious,  and  this  causes  an  upward  movement  of 
labor  and  capital  in  the  group  system.  More  workers 
will  be  needed  in  the  subgroups  A'",  B'",  and  C", 
where  raw  materials  receive  the  finisliing  touches, 
and  also  in  the  other  subgroups  above  the  lowest 
tier.  It  is  to  these  subgroups  that  a  large  portion 
of  the  new  capital  itself  will  come,  and  the  labor  will 
come  with  it.  Larger  incomes,  more  luxury,  more 
labor  spent  in  elaborating  goods  as  compared  with 
that  required  for  procuring  crude  materials,  —  such 
is  the  order. 

Effect  of  an  Increase  of  Both  Labor  and  Capital.  — 
It  is  clear  that  a  certain  increase  of  capital  might 
practically  neutralize  the  increase  of  population,  in 
80  far  as  the  movements  thus  far  considered  are  con- 


iM'itAl'^iiiMi  A". 


PERPETUAL  CHANGE  OF  SOCIAL  STRUCTURE   247 

cernod,  and  r  greater  increase  of  capital  would  re- 
verse the  original  down  ward  movemont  caused  by  the 
increase  of  labor  and  result  in  a  pcrnianent  upward 
movement  toward  the  subgroups  A"\  B'",  and  ("". 
In  this  case  the  men  occupy  themselves  more  and 
more  in  making  the  higher  form  utilities.  They  make 
finer  clothing,  costlier  furniture,  etc.,  and  the  new 
prodiicti(m  i  quires  proportionately  less  raw  material 
than  did  the  old.  This  is  the  suppositi(jn  which  cor- 
responds to  the  actual  fpcts.  Capital  is  increasing 
faster  than  labor,  and  consumption  is  growing  rela- 
tively more  luxurious;  dwellings,  furnishings,  equi- 
page, clothing,  and  food  are  improving  in  quality 
more  than  they  are  increasing  in  quantity.  Goods  of 
high  cost  are  predominating  more  and  more,  and  the 
subgroups  that  produce  them  are  getting  larger  shares 
of  both  labor  and  capital.  Population  drifts  locally 
toward  centers  of  manufacturing  and  commerce.  It 
moves  toward  cities  and  villages  in  order  to  #,'et  into 
the  subgroups  which  have  there  their  principal 
abodes.  The  growth  of  cities  is  the  visibi"  sign  of  an 
upward  movement  of  labor  in  the  subgroup  series. 

A  Change  in  the  Relative  Size  of  General  Groups.  — 
If  all  the  steady  movements  of  labor  and  capital  were 
stated,  it  would  appear  that  a  relative  increase  in  the 
amount  of  labor,  as  compared  with  the  amount  of 
capital,  would  enlarge  the  three  general  groups,  AA''', 
BB'",  and  ('('"',  and  reduce  the  comparative  size  of 
the  general  group ////'",  which  maintains  the  fund  of 
capital  by  making  good  the  waste  of  acti  c  instru- 
ments. Gain  in  capital  estimated  per  capita  would 
cause  relatively  more  of  the  labor  ami  more  of  ihj- 
fund  of  capital  to  betake  itself  to  the  group  HH'". 
The  movement  towanl  the  upper  subgroups  wh  ch  is 


'm^ir^^ '^^^M^mr  ^?  J'm 


248 


ESSENTIALS  OF   ECONOMIC  THEORY 


actually  going  on  is  attrntlwl  by  a  drift  toward  this 
general  group.  An  incn-ase  of  luxurious  consunipt  ion 
and  an  cnlargrment  of  the  ptTmanent  stock  of  capital 
goods  go  together. 

Regularity  and  Sbumess  of  Movenicnh  cau.9cd  by 
CiMnges  in  the  Amounts  of  Labor  and  Cajnlul.  —  The 
important  fact  about  the  movements  thus  far  traced 
is  that  they  arc  steady  and  slow.     They  do  not  often 
call  for  taking  out  of  )nc  part  of  the  sy.steni  mature 
men  who  have  been  trained  to  work  there.    I'u'y  are 
movements  of  labor  which  do  not,  in  the  main,  involve 
any  considerable  moving  of  laborers  from  grr.up  to 
group.    The  sons  of  the  men  in  the  subgroup  A  do  not 
all  succeed  to  their  '"Athers'  occupations,  i.ut  many 
of  them  enter  A',  A"  and  A'",  so  that  labor  moves 
from  the  lowest  subgroup  to  higher  ones.    Such  a 
transfer  of  labor  entails  few  hardships  for  any  one, 
and  in  general  it  is  to  be  said  that  all  the  movements 
j  of  labor  and  capital  which  are  occasioned  by  quanti- 
tative changes  in  the  supply  of  these  agents  are  of 
this   comparatively   painless   and    frictionless    kind. 
About  changes  cau.sed  by  new  methods  of  production 
there  is  a  difTerent  story  to  tell.     The  transfonna- 
tion  of  the  world  does  not  go  on  without  some  dis- 
quieting  results,   however   inspiring   it,   the   remote 
outlook  which  they  afford.    The  irregularity  of  the 
general  movement,  the  fact  that  it  goes  by  forward 
impulses  followed  by  partial  halts,  is  a  further  seri- 
ous fact.     Hard  times  present  their  grave  problems, 
and  we  need  to  know  whether  it  is  necessary  that 
dynamics  — the  natural  and  forward  movement  of 
the  industrial  system  —  should  produce  them.     This 
problem  is  for  later  consifleration. 
Movemmts  earned  by  Chnnne-H  in  the  Processes  of 


PERPETrAL  CHANOK  OF  SOCIAL  STRUCTURE   249 

Production.  —  Mrrhanical  invontiona  aro  typical  mov- 
ers of  labor  and  capital  —  constant  disturlx-rs  of  what 
would  otherwise  be  a  comparatively  tranquil  state. 
Dynamos  for  generating  electricity  and  devices  for 
conducting  it  to  great  distances  from  its  sources  have 
done  much  to  rearrange  the  society  of  a  score  of  years 
ago,  as  economical  steam  engines  had  done  at  an 
earlier  date.     Every  dev-  o  that  "saves  labor"  cills 


for  a  rearrangement  jf 
industry. 

In  a  perfectly  s*  •  i  •  '•  ■ 
we  have  seen,  a  -'   .   '  ,• 
means  a  norm- !  n.  i       if 
among  the  prof       nr  <    mi 
among  the  loc.      !r,  i  .   > 
elements  would  su'isi,,  • 
become  motionless,  a.'       i 
comes  still  in  a  sheltei    . 


the  system  of  organized 

.!■'"*•  '■  ■   '       would  be,  as 

!  r  -   ,)i    I'l     iciety,  which 

<i\<'\\[     '  I,"').,'  and  capital 

iJir'oups  and  also 

'I'.i'  i'al  area.     71ie 

equilibrium  and 

is  level  and  be- 

.liic  bodv  of  fluid 


4   i  I       I 


'iiiii 


takes  its  .standard  shape  and  retains  it,  so  long  as  no 
disturbing  force  appears.  Now,  society  would  have 
such  a  standard  :-hapn  and  woukl  require,  in  the  ab- 
sence of  dynamic  changes,  a  relatively  short  time  in 
order  to  conform  more  or  less  closely  to  it,  if  it  were 
not  for  the  unnatural  apportionment  of  population 
in  different  part;  of  the  area  that  the  society  inhabits 
and  the  obstacles  which  wholesale  migrations  en- 
counter. For  the  solution  of  problems  of  &c  present 
and  the  near  future  we  must  accept  as  a  stc  .dard  the 
quasi-static  adju.stment  of  the  populatioi  .lid  the 
consequent  quasi-static  .soi:ction  of  indu.stries  in  the 
different  local  divisions  of  (he  broad  area  —  the  ar- 
rangem.ent  th.at  wp  have  described  as  locating  an  ex- 
cess of  manufacturing  in  the  more  densely  peopled 
■-.reas  and  an  excess  of  agriculture  in  the  more  sparsely 


t 

I'' 


it 


Ml^.'/iiM' 


250 


ESSENTIALS   OF   ECONOMIC  THEORY 


settled  ones.  With  this  quaHfication  it  may  be  said 
jthat  there  is  a  standard  apportionment  of  labor  and 
capital  among  the  producing  groups,  and  that  these 
agents  gravitate  powerfully  and  even  rapidly  toward 
it.  If  there  were  a  certain  amount  of  lalx)r  and  cap- 
ital at  /I,  a  certain  amount  at  B,  and  so  throughout 
the  system,  this  standard  shape  would  be  attained, 
and  the  elements  would  not  move,  except  as  a  very 
slow  movement  would  l)o  cau.'^ed  by  changes  in  the 
comparative  density  of  population  of  different 
regions.*  This  standard  shape  woukl  long  remain 
nearly  fixed  if  it  were  not  for  the  appearance  of  the 
dynamic  influences  which  are  so  active  within  the 
area  we  are  studying. 

Allemalitms  in  the  Direction  of  Movements  earned 
by  Improved  Methods.  —  In  a  dynamic  state  this 
standard  shape  itself  —  the  ai)proximately  .static  one 
—  is  forever  changing.  At  one  time,  for  example, 
conditions  exist  which  call  for  a  certain  amount  of 
labor  at  A,  another  amount  at  B,  etc.  A  little  later 
the.se  respective  (juantities  at  A,  B,  etc.,  are  no  longer 
the  natural  or  .standard  quantities;  for  something 
has  occurred  that  calls  for  less  labor  at  A,  more  at  B, 
etc.  If  A  represents  wheat  farming,  the  amount  of 
labor  that  it  recjuircMl  when  grain  was  gathered  with 
sickles  is  more  than  is  nece.ssary  when  it  is  gathered 
with    self-binding    reapers,    always    provided    that 

'  It  is  obvioua  that  capital  as  well  as  population  is  dis- 
tril)utc<l  Willi  uneven  dciisily  over  the  territory  ocoupio.l 
by  soeiety;  but  the  movement  of  eapital  is  less  obstructed 
than  that  of  a  Kreat  body  of  [leojjle,  and  nioretjver  it  is  chiefly 
the  fact  that  the  jK>ople  are  not  dispersed  over  the  area  in 
a  natural  way  which  creates  the  chief  obstacle  to  the  moviriR 
of  capital.  It  goes  eiusily  when  it  uecompanicH  a  migration 
of  laborers. 


_ 


'V\!5iW3WEP^. 


PERPETUAL  CHANGE   OF   SOCIAL  STRUCTURE       251 


there  'as  been  no  increase  in  population,  which 
wouJd  ?oquire  an  increase  in  the  fooil  supply.  The 
society  therefore  will  not  be  in  what  has  now  become 
its  standard  shape  till  men  have  been  moved  from  the 
wheat-raising  subgroup  to  others. 

If  the  invention  of  the  reaper  were  not  followed  by 
any  others  and  if  no  other  disturbing  changes  took 
place,  labor  would  move  from  the  one  group,  distrihuto 
itself  among  others,  and  luring  the  system  to  a  now 
equilibrium ;  but  it  has  not  time  to  do  this.  It  Ix-gins 
to  move  in  the  way  that  the  new  condition  occasioned 
by  the  introduction  of  the  reapir  g  machine  impels 
it  to  move;  but  before  the  transfer  is  at  all  complete 
there  is  a  new  invention  somewhere  else  in  the  system 
that  starts  a  movement  in  some  other  direction.  Be- 
fore the  lalxjr  from  A  is  duly  distributed  in  B,  C,  etc., 
there  is  an  invention  in  B  which  .starts  some  of  it 
toward  other  points. 

Why  Movements  are  Perpeiml  as  well  as  Changeful. 
—  Such  miprovements  are  perpetual,  and  the  dy- 
namic society  is  not  for  an  instant  at  rest.  If  the 
disturbing  causes  would  cease,  the  elemet,'  of  the 
social  body  would  find  their  abiding  place;  and  the 
important  fact  is  that  at  any  one  instant  tin  re  is  such 
a  resting  place  for  each  laborer  and  each  bit  of  capital 
in  the  whole  sy.^item.  As  we  have  .seen,  the  men  and 
the  productive  funds  would  go  to  tli>-se  points  but 
for  the  fact  that  before  they  have  tim(>  to  ren'h  them 
new  di.sturbances  occur  that  call  them  in  new  direc- 
tions. Again  and  again  the  satne  thing  occurs,  and 
there  is  no  opportunity  for  placing  labor  and  capital 
at  exactly  the  points  to  which  recent  clum.nes  call 
them  before  still  further  improvements  begin  to  call 
them  elsewhere. 


'    fl 


^^' 


252 


ESSENTIALS   OF   ECONOMIC  THEORY 


Why  Technical  Changes  are  more  disturbing  than 
a  General  Injlux  or  Ejflux  of  Populat^lon.  —  When  the 
moving  of  labor  is  gradual,  it  is  effected,  not  so  much 
by  transferring  particular  men  from  one  occupation 
to  another,  as  by  diverting  the  young  men  who  are 
about  entering  the  field  of  employment  to  the  places 
where  labor  is  most  needed.     When  the  son  of  a 
shoemaker,   instead   of  learning  his   father's  trade, 
becomes  a  carpenter,  no  laborer  has  abandoned  an 
accustomed    occupation    and    Maken    himself    to 
another;    but  labor  has  gone  from  the  shoemaking 
trade  to  that  of  carpentering.     A  man  often  stays 
where  he  is  tr)  the  end  of  his  life,  although  .luring  that 
life  labor  has  moved  freely  out  of  his  o(TUf)ation  to 
others.     If  we  represent  the  facts  by  a  diagram,  they 
will  stand  thus:  — 


50 

47        38 


40        70 


52        41 


100     Natural  and  actual  apportionment  of 
labor  in  1850. 

35^-^^90^       gQ     Natural  apportionment  after  chanec 
of  nu'thod  in  1850. 

80         85     Apportionment    in    I8,';5    when    the 
moveiiuiit     initiated     in     1850    Is 
partially  fonipict< d 
_65         102      Natural  apporfionm.nt  in   1855,  with 
~  nuiveniint.s  then  initiated 

A,  n,  C,  and  /)  repre.sent  different  occupations  or 
suh^'rciips  ill  \\w  table  we  have  before  used.  At  (Mie 
date  a  static  adjustment  rai!,>,|  for  fifty  units  of  labor 
at  .I.  forty  at  fi,  seventy  at  (',  and  one  hundred  at  D. 
A  half  dera.le  later,  after  impro-enient.s  had  taken 
r)lace  at  .1 .  H,  and  />.  static  f.-rer-v,  if  t  fu-v  were  allowerj 
to  have  (hrir  full  efT(-cf,  w<,iild  leave  onh  forty-five 
inni  at  A,  and  thirty-five  at  fi.  hut  they  would  place 


PERPETUAL  CHANGE   OF  SOCIAL  STRUCTURE       253 

ninety  at  C  and  at  D.  The  first  movements  that 
would  tend  to  bring  this  about  are  in  the  direction 
indicated  by  the  dotted  lines.  The  transfeis  are 
made,  not  by  forcing  men  from  A ,  B,  and  1)  to  C, 
but  chiefly  by  diverting  to  C  yjung  lalxirers  wlio 
would  otherwise  hav(;  gone  to  A,  B,  and  /;  to  re- 
place men  who  are  leaving  in  these  gn.ups. 

Now,  before  the  Iransf.-rs  are  completed  something 
happens  that  calls  for  a  different  movement.     Let 
us  say  that  only  three  units  of  labor  have  us  yet  gone 
from  A  to  C  instead  of  rive,  leaving  forty-seven  lU  .1 , 
only  two  have  gone  from  B,  leaving  thirty-eight :  and 
only  five  have  gone  from  /;,  leaving  ninety-five  at 
that  point.     Eighty  wouhl  then  be  at  C,  and  the  static 
adjustment  woukl  not  have  Ix'en  perfectly  attained. 
It  is  at  this  point  that  a  new  change  of  conditions  oc- 
curs, which  calls  for  fifty-two  units  .it  .1.  forty-one  at 
B,  sixty-five  at  C,  and  a  hundred  iirid  two  at  I).     (' 
now  contributes  something  to  .1  and  B,  hut  it  gives 
more  to  D;  and  the  fluctuations  go  on  forev(>r.    Pur- 
ticular  njen  may,  mon-  often  than  otherwise,  stay  in 
their  places,  since  the  incoming  .stream  of  new  labor, 
by  going  where  it  is  needed,  may  sufliee  to  make  th.' 
adjustments,  in  .so  far  as  they  are  gradually  made; 
but  labor,  in  the  sen.se  of  the  (juantum  of  energy  em- 
bodied in  a  succession  of  generations  of  men.  is  nev<'r 
at  rest.     It  is  a  veritable  Wandering  .lew  for  restless- 
ness and  in  a  p(>rpetual  (juest  of  places  where  it  can 
remain.     Moreover,  there  are  to  be  taken  into  account 
changes  so  sudden  that  they  thrust  particular  workers 
from  one  group  to  another. 

A  Perjxtml  Effort  to  conform  to  a  Stniid(ird  ShajHi 
whkh  u  itself  Changimj.  —  We  think,  then,  of  society 
as  striving  toward  an  endless  series  of  ideal  .shapes, 


Li.  .JSS^^ 


254 


ESSENTIALS   OF   ECONOMIC   THEORY 


never  reaching  any  one  of  them  and  never  holding 
for  any  length  of  time  any  one  actual  shape.    One 
movement  is  not  completed  before  another  begins,  and 
at  no  one  time  is  the  labor  apportioned  among  the 
groups  exactly  in  the  proj)ortions  that  static  law  calls 
for.     Men  are  vitally  interested  to  know  what  they 
have  to  hope  for  or  to  fear  from  this  perpetual  neces- 
sity that  some  lalxir  should  move  from  point  to  point. 
Questims  concerning  the  Effects  of  these  Transfor- 
mations. —  Thes(;  changes  of  shape  involve  costs  as 
well  as  Ijenefits.    The  gains  are  permanent  and  the 
cust«  are  transient,  but  are  not  for  that  reason  un- 
important.   They  may  fall  on  persons  who  do  not  get 
the  full  measure  of  the  offsetting  gains.    What  we 
wish  to  know  about  any  economic  change  is  how  it 
will  affect  humanity,  and  especially  working  human- 
ity.    Will  it  make  laboring  men  better  off  or  worse 
off?    If  it  benefits  them  in  the  end,  will  it  impose 
on  them  an  immediate  hardship?    Will  it  even  make 
certain  ones  pay  heavily  for  a  gain  that  is  shared  by 
all  classes?    Are  there  some  who  are  thus  the  espe- 
cial martyrs  of  progress,  suffering  for  the  general  good  ? 
Natural    Transfiyrmalims   of  Society   increase   its 
Productive   Power. —  There   is    no   doubt   that   the 
changes  of  shape  through  which  the  social  organism 
is  going  cause  it  to  grow  in  strength  and  efficiency. 
More  and  more  power  to  produce  is  coming,  as  we 
have  seen,  in  consequence  of  these  transmutations. 
They  always  involve  shifting  labor  about  within  the 
organization  and  often  involve  shifting  laborers,  tak- 
ing some  of  them  out  of  the  subgroups  in  which  they 
are  now  working  and  putting  them  into  others,  some- 
thing that  cannot  l)e  done  without  cost. 

Immediate  Effects  of  Labor  Saritig.  —  Inventing  a 


PERPETUAL   CHANGE   OF  SOriAL   STRl'CTtRK      255 

machine  that  can  do  the  work  of  twenty  mon  will 
cause  some  of  the  twenty  to  Ik-  disrharK,-.!.       They 
feel  the  burden  of  finding  new  places,  and  if  t'.  \  are 
skilled  workmen  and  their  trade  is  no  |„f,j,,.r  worth 
practicing,  they  lose  all  the  advantage  th.  v  haw  .„- 
joyed  from  special  skill  in  their  occupati.,ris.     1  >o 
they  themselves  get  any  adecjuate  offset  for  this   „r 
does  society  as  a  whole  divide  the  benefit  i.j  such  a  way 
that  those  who  pay  nearly  the  whole  cost  get  only  their 
mmute  part  of  the  gain?    Is  there  unfair  dealing  in- 
herent  m  progress  in  the  economic  arts,  and  must  we 
justify  the  movement  only  on  the  ground  of  utility, 
though  knowing  that  a  moralist  would  condemn  it? 
These  are  some  of  the  general  (juestions  that  are  to  be 
decided  by  a  study  of  this  phase  of  economic  dynam- 
ics.    We  need  to  know  both  what  the  movement  will 
in  the  end  do  for  humanity  and  what  it  will  at  once 
do  for  particular  workmen.'     In  addition  to  ascer- 
tammg  what  the  ultimate  results  of  the  movement 
will  be,  we  need  to  trace,  with  as  much  accuracy  as 
IS  possible,  the  eff(>cts  of  the  disturbances  that  are 
mvolved  in  generally  beneficent  changes. 

'Our  .study  may  load  to  «  moral  vrrdirt  without  bring 
Itself  an  ethi.a!  study;  wo  limit  tho  i„„uiry  to  questions 
of  fart  but  iKTciv,-  that  mnw  of  tlu-  facts  are  of  such  a  kind 
that  they  muHt  lead  a  reader  to  condemn  or  approve  the 
social  economic  8y.stem. 


K 


mfJi^i^MrlMl 


•^:5^- 


CHAPTER  XVI 


EFFECT  OF  IMPROVEMENTS  IN  METHODS  OF  PRODUCTION 

Displacement  of  Labor  mid  Cajrital  by  Inrentions.  — 
Inventions  arc  "labor-saving."  Employers  are  en- 
gaged in  a  race  with  each  other  in  reducing  the  out- 
lays involved  in  producing  goods,  and  a  common 
way  of  doing  this  is  to  devise  machinery  that  will 
do  what  laborers  have  heretofore  done.  The  same 
thing  is  accomplished  by  developing  cheap  sources  of 
motive  power  or  introducing  new  commodities  which 
are  good  substitutes  for  dearer  ones.  Mechanical 
automata  have  at  a  thousand  points  taken  labor  out 
of  human  hands;  electricity,  which  is  "harnessing 
Niagara,"  may  at  some  time  harness  waves  and  winds 
and  make  them  turn  the  literal  wheels  of  mechanical 
progress.  Such  things,  by  causing  a  given  amount 
of  labor  to  proiluce  a  larger  amount  of  coiHumcr.^' 
wealth,  are  product  multipliers;  but  this  is  the  same 
thing  as  saying  that  they  yield  a  given  product  at  the 
cost  of  less  lalx)r,  and  as  we  more  commonly  see 
their  effect  in  this  light,  we  call  them  lalwir  savers. 

Why  Labor  Saving  is  not  ahmys  ami  inrywhcrc 
Welcomed.  —  To  an  offhand  view  it  would  seem  that 
product  multiplying  is  the  greatest  l)lessiiig  that,  in 
an  economic  way,  can  come  to  humanity;  and  it' 
general  and  permanent  vffi'viy.  be  eoiisidcnd,  it  is  so. 
The  solitary  hunter  who  has  to  eateh  and  club  h\> 
game  would  get  umjualified  benefit  from  tlic  possession 
of  a  bow  and  arrows;    the  tishcrman  would  get  tlie 

266 


IMPROVEMENTS    IN    METHODS 


257 


same  benefit  from  a  canoe,  the  cultivator  of  the  soil 
from  a  spade,  etc.  Society  in  its  entirety  is  an  iso- 
lated being  and  derives  similar  gains  from  engines, 
looms,  furnaces,  steamships,  railroads,  telegraphs, 
etc.  Yet  then;  are  persons  within  the  great  social 
organism  to  whom  the  benefit  from  mie  .si)ecial  im- 
provement may  be  small  and  the  cost  great.  There 
are  none  who  are  not  better  off  Ix'cause  of  all  imi>rove- 
menta  pix^t  and  present. 

The  General  Demand  for  Labor  not  Les.sened.  —  It  is 
a  matter  of  common  experience  that  new  machines 
are  ialwr  displiucrs.  At  its  introduction  an  econom- 
ical device  often  forces  some  men  to  svvk  new  occupa- 
tions, but  it  never  reduces  the  general  demand  for 
labor.  As  progress  closes  one  field  of  employment 
it  opens  others,  ami  it  has  come  alx)ut  that  after  a 
century  and  a  quarter  of  brilliant  invention  and  of 
rapid  and  general  substitution  of  machine  work  for 
hand  work,  there  is  no  larger  proportion  of  tlie  labor- 
ing population  in  idleness  now  than  there  was  at  the 
beginning  of  tlu'  period. 

A  Voluntary  Reduction  of  Toil  Desirable  and  Prob- 
able. —  A  full  study  of  the  effects  of  technical  prog- 
ress will  show  that  there  is  never  a  reduction  of  the 
general  field  for  emj)Ioyment  in  conse(|U(iice  of  it. 
There  is  an  increase  of  pay,  and  this  cau.ses  a  certain 
unwillingness  to  work  for  as  many  hours  as  men 
formj-rly  worked;  and  there  is  also  a  chnrige  in  the 
nature  of  the  operations  that  labor  performs,  which 
tends  in  the  dinctioii  of  more  comfort  and  less  painful 
toil.  For  the  famous  stat.  ni.rit  cf  J.  S.  Mill  that  "  It 
is  questionable  if  all  th*  mechanical  inventions  yet 
made  have  lightened  the  day's  toil  of  any  human 
being"  we  may  .safely  substitute,  "It  is  the  natural 


?f^ 


258 


iasSta^TIALS  OF   ECONOMIC  THEORY 


tendency  of  useful  inventions  to  lighten  the  toU 
of  workers  and  to  give  them,  withal,  a  greater  reward 
for  their  work."  Mechanical  progress  is  the  largest 
single  ground  for  hope  for  the  future  of  laboring  hu- 
manity, and  by  its  effects,  direct  and  indirect,  it  has 
already  insured  a  great  alleviation  of  toil,  with  an 
increase  in  its  rewards.  It  has  helped  to  counteract 
the  world  crowding  that  for  a  century  has  gone  on  and 
the  diminishing  returns  from  agriculture  which  the 
crowding  entaik.  Inventions  may  make  disturb- 
ances, and  their  better  effects  may  be  temporarily 
and  locally  counteracted ;  but  a  society  where  com- 
petition rules  is  sure  to  secure  the  benefits  in  the  end 
and  does,  in  fact,  secure  them  in  greater  and  greater 
mea.sure  as  the  years  go  by.  Such  are  some  of  the 
theses  which  research  will  justify. 

Facia  concerning  Disturbances  incidental  to  Prog- 
ress. -We  have  first  to  take  account  of  the  disturb- 
ances.   They  are  prominent  in  economic  discussion 
and  constitute  the  subject  of  one  of  the  grave  indict- 
ments  brought  against  the  system  of  competitive 
indu.stry.    They  have  actually  caused  great  hardships 
in   the   past,   as  skilled   handicraftsmen   have  seen 
machines  come   into   use   which,   for  rapidity  and 
accuracy  of  work,  excel  the  best  results  that  long 
apprenticeships  formerly  gave.     Now  that  machinery 
has  possession  of  most  of  the  field,  there  is  no  longer 
the  f(jrmer  opportunity  for  displacing  handworkers; 
but  the  remainder  of  hardships  incidental  to  progress 
is  not  to  he  overlooked.     This  part  of  the  dynamic 
movement  involves  present  local  sacrifices  for  the 
sake  of  future  general  gains.     Here,  therefore,  there 
are  developed  antagonisms  of  int. Test   which   may 
hinder  progress  and,  if  they  were  extensive  enough. 


IMPROVEMENTS   IN   METHODS 


259 


might  conceivably  throw  a  doubt  over  the  future  of 
the  working  class.    While  there  is  no  great  dispo- 
sition to  question  the  ultimate  Ix'ncfit  which  me- 
chanical progress  insured,  thcio  is  some  uncertainty 
as  to  the  process  by  which  this  benefit  is  extended 
to  workers  and  there  is  a  struggle  to  avoid  the  im- 
mediate cost.    There  is,  in  some  quarters,  a  disposi- 
tion to  rate  the  cost  so  highly  as  to  draw  the  inference 
that  we  need  to  adopt  a  socialistic  plan  of  living  for 
the  sake  of  enabling  workers  to  avoid  the  hardships 
and  secure  the  benefits  of  "labor  saving."    It  will 
appear,  however,  if  we  grasp  the  essential  facts  of 
what  we  may  call  the  dynamics  of  method,  that  the 
tendency  of  it  is  to  reduce  the  burdens  which  progress 
entails,  and  to  diffuse  a  large  share  of  the  benefits  of 
it  among  the  working  class.    It  will  further  appear 
that  the  socialistic  plan  of  organizing  industry  would 
at  least  throw  a  doubt  over  the  progress  itself.    Noth- 
ing, on  the  whole,  puts  the  future  of  industry  con- 
ducted on  the  competitive  plan  in  a  more  optimistic 
light  than  the  fact  of  the  progress  in  productive 
methods  which  it  insures.     It  is  the  strongest  guar- 
anty of  a  "good  time  coming,"  in  which  all  humanity 
will  rejoice  when  it  comes  and  should  rejoice  by  an- 
ticipation. 

The  Law  that  insures  the  Survival  of  Beneficial  Pro- 
cesses Only.  —  It  is  self-evident  that  wherever  there 
is  a  saving  of  labor  needed  to  make  a  given  amount 
and  kind  of  product,  there  is  an  increase  in  the  pos- 
sible product  that  is  created  by  the  aid  of  a  given 
amount  of  labor.  If  workers  them.selves  get  a  share 
of  the  gains,  this  fact  will  show  itself  through  that 
beneficent  shortening  of  the  working  day  to  which  we 
have  alluded.    The  men  will  be  ur.  willing  to  stand  the 


f 


R 


II 


260 


KS8ENTIALS  OF   EOT^NOIflC  THEORY 


weariness  and  the  confinement  of  working  through  too 
many  hours  and  will  be  inclined  to  take  more  holidays 
and  vacations;  all  of  which,  when  it  comes  about 
in  a  natural  way,  is  an  indication  that  the  industrial 
organism  as  a  whole  has  put  its  liantl  on  a  new  and 
powerful  lever  and  is  enriching  its  members  by  means 
of  it.     It  does,  however,  have  to  change  the  character 
of  its  work,  ami  this  means  that  some  labor  has  to 
be  transferred  from  one  subgroup  to  another.    The 
laborer  displaced  by  an  invention  at  a  particular  point 
continues  to  be  wanted  somewhere.     When  he  and 
others  have  found  their  new  employments,  the  good 
result  appears,  —  the  increase  and  improvement  of 
goods  produced,  —  and  society  as  a  whole  then  gets 
the  benefit  which  would  come  to  an  isolated  worker 
who,  without  remitting  his  labor,  finds  his  appliances 
growing  better  and  the  fruits  of  his  labor  growing 
larger.    The  collective  body  gets  a  greater  income 
than  before,  and  the  workers  share  in  the  gain. 

Importance  of  the  New  Forms  which  the  Social  In- 
come Takes.  —  This  increasing  income  takes  the  form 
in  which  society  now  rctjuires  it,  and  it  is  this  which 
brings  about  the  readjustment  of  lalxjr  — or  the 
changes  in  the  amounts  of  labor  u.sed  in  particular 
suljgroups  —  which  have  caused  hardship  in  the  pa.st. 
Nature  of  the  Incidental  Kvils  to  be  Dreaded.  —  The 
problem  we  have  to  face  is  a  danger  that  labor  may 
be  displaced  either  (I)  from  (he  particular  point 
within  a  productive  establishment  at  which  it  is  now 
working,  or  (2)  from  the  productive  establishment 
as  a  whole,  or  (3)  from  a  subgroup,  or  (4)  from  the 
general  grouf)  of  which  the  subgroup  is  a  part.  Out 
of  industrial  society  in  its  entirety  it  cannot  thus  be 
forced.    There  is  a  case  in    vhich  the  men  whose 


^  •» 


IMPR0VEMENT8   IN   METHODS 


261 


crafts  are  supplanted  by  machines  may  all  stay  where 
they  are  and  operate  the  machines ;  but  that  involves 
forcing  other  men  to  change  their  occupations.  There 
are  more  cases  in  which  these  men  may  stay  in  the 
mill  or  shop  that  employs  them,  but  not  in  the  same 
department  of  it.  There  are  still  more  cases  in  which 
they  may  stay  in  their  original  subgroups,  and  in  a 
majority  of  cases  they  may  stay  in  their  general 
groups.  In  every  instance  there  are  places  for  thorn 
in  the  working  society. 

Local  Expulsions  of  Labor.  —  When  a  single  em- 
ployer who  is  one  of  many  competitors  in  an  indus- 
try adopt^s  an  important  labor-saving  device,  it  may 
be  possible  for  him  to  keep  all  his  men  employed  and 
to  let  the  improvement  show  itself  wholly  as  a  means 
of  increasing  the  output.    He  may  secure  a  machine 
which  will  do  what  twenty  men  formerly  did.     If  it 
were  possible  to  cut  the  uppers  of  a  dozen  shoes  by  the 
quick  stroke  of  a  single  die,  the  machine  that  carried 
this  armature  would  do  the  work  of  perhaps  twelve 
knives  handled  by  that  number  of  skillful  workmen. 
If  the  original  number  of  men  were  retained  in  the 
cutting  department,  and  if  each  of  them  were  fur- 
nished with  the  new  appliance,  it  would  mean  that 
twelve  times  as  many  uppers  would  be  cut  as  were 
cut  before  the  change  was  made.     There  would,  of 
course,  be  no  use  in  trying  to  do  so  much  cutting  of 
uppers  for  shoes,  without  doing  twelve  times  as  much 
sewing,  welting,  making  soles  and  heels,  etc.,  and  to 
secure  all  this  at  once  would  require  a  twelve-fold 
enlargement  of  the  manufacturer's  plant.    This  is  too 
much  to  secure  at  once.    The  manufacturer  might 
perhaps  double  the  output  of  his  mill  and   nearly 
doishle  the  number  of  his  employees,  but  that  would 


I. 


ri 


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MICROCOPY   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


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262 


ESSENTIALS   OF   ECONOMIC   THEORY 


require  only  two  of  the  twelve  cutters  he  formerly  had. 
The  new  workers  would  be  in  parts  of  the  mill  otMer 
than  the  one  where  the  great  saving  of  labor  was 
effected.  Ten  men  would  be  removed  from  the  cut- 
ting department,  and  the  two  loft  there  would  cut, 
by  the  aid  of  the  new  machines,  twice  as  many  uppers 
as  the  whole  number  cut  before,  and  that  would  re- 
quire the  furnishing  of  a  double  number  of  all  other 
parts  of  the  shoes  and  a  double  working  force  to 
make  them.  The  ten  men  liberated  from  the  cutting 
department  would  be  available  for  this  purpose,  and 
new  ones  would  be  brought  in  and  set  sewing,  pegging, 
lasting,  welting,  etc.  Within  a  single  establishment, 
therefore,  a  radical  saving  of  labor  at  one  point  usually 
involves  some  shifting  of  labor  from  that  point  to 
others,  though  it  may  increase  the  total  number  em- 
ployed in  the  establishment  which  secures  the  eco- 
nomical device. 

The  Effect  on  a  Subgroup  of  an  Improvement  by  One 
Entrepreneur.  —  If  an  employer  who  has  this  ex- 
perience is  one  of  a  hundred  in  the  shoemaking 
industry  and  the  only  one  who  secures  the  cutting 
machine,  the  market  will  receive  as  large  an  increase 
of  the  product  as  would  be  involved  by  multiplying 
the  output  of  his  mill  by  two,  without  requiring  that 
the  price  should  be  more  than  slightly  reduced.  An 
improvement  which  is  monopolized  for  a  time  ly  a 
single  entrepreneur  seldom  renders  it  necessary  to 
reduce  che  aggregate  of  the  labor  in  his  employment. 
Far  more  often  it  makes  it  for  his  interest  to  increase 
the  number  and  to  put  new  labor  in  every  part  of  the 
plant  where  no  improvement  in  method  has  been 
made.  It  is  often  the  fact,  however,  that  labor  has 
to  abandon  other  establishments  in  this  subgroup, 


IMPROVEMENTS    IN    METHODS 


263 


T 


and  enough  of  it  may  do  so  to  cause  the  amount  in 
the  entire  subgroup  to  become  somewhat  smaller  by 
reason  of  an  improvement.  In  the  case  of  a  single 
employer  there  is  a  bare  possibility  that  no  one 
should  be  moved,  in  conse(|uence  of  an  economical 
invention,  even  from  one  part  of  the  mill  to  another. 
The  manufacturer  of  our  illustration  might  even  keep 
his  twelve  cutters  at  work  after  the  introduction  of 
the  machines  referred  to  and  do  twelve  times  as  much 
cutting,  provided  that  he  could  quickly  increase  his 
output  of  finished  shoes  to  twelvefold  its  former 
amount.  There  are  practical  reasons  why  he  could 
almost  never  do  this;  but  if  he  actually  did  it,  he 
might,  by  some  reduction  in  the  price  of  shoes,  find  a 
market  for  this  increased  product.  If  the  reduction 
of  price  were  great,  some  competitors  would  prob- 
ably go  at  once  out  of  the  business ;  but  it  is  never 
the  policy  of  a  successful  producer  to  make  unneces- 
sary haste  in  reducing  prices,  and,  as  a  rule,  the  reduc- 
tion is  gradual.  The  increase  of  product  from  the 
very  efficient  mill  must  cause  a  certain  reduction  in 
the  rate  at  which  it  sells  its  goods,  and  this  is  apt  to 
force  manufacturers  who  are  particularly  ill  equipped 
and  cannot  keep  pace  with  the  rate  of  improvement 
which  their  enterprising  competitor  establishes  to  go 
out  of  business.  They  thus  relieve  the  mark(^t  of  so 
much  of  the  product  as  th(^y  have  contributed  and 
make  a  place  for  the  increased  output  of  the  newly 
equipped  mill.  In  such  a  case  the  total  output  from 
the  subgrouf)  is  not  very  greatly  increased,  and  the 
price  of  the  product  does  not  need  to  be  greatly 
reduced. 

Sto.v.do.Td  Prices  fixed  hy  Cof-f  iv  the  most  Ecnnnwicnl 
Establishment.  —  It  is  a  vitally  important  fact,  as 


264 


ESSENTIALS   OP    ECONOMIC   THEORY 


we  shall  soon  see,  that  the  price  of  an  article  is,  in  a 
dynamic  society,  always  tending  toward  the  cost  of 
making  it,  not  in  the  most  inefficient  establishment, 
where  it  is  produced  "at  the  greatest  disadvantage,"' 
but  in  the  most  efficient  one  of  all.    The  ultimate 
effect  of  any  great    improvement    is    naturally   to 
close  the  shops  of  all  employers  who  do  not   adopt 
it  or  get  an  equivalent  advantage  of  some  kind.     Ulti- 
mately the  whole  subgroup  will  be  in  the  state  of 
efficiency  it  would  have  reached  if  the  improvement 
had  been  adopted  by  every  entrepreneur  on  its  first 
appearance. 

The  Effect  of  an  Improvement  in  Production  which  is 
quickly  adopted  by  a  Whole  Subgroup.  —  When  an 
improvement  is  immediately  adopted,  not  by  one 
employer  merely,  but  by  all  employers  in  a  subgroup, 
it  is  likely  to  cause  a  quicker  displacement  of  labor 
from  the  subgroup  as  a  whole.  A  very  economical 
machine  introduced  by  its  inventor  or  manufacturer 
and  quickly  adopted  by  all  employers  at  A"  would 
nearly  always  force  a  certain  number  of  laborers  to 
leave  that  industry  and  find  employment  elsewhere, 
if  it  were  not  for  one  commercial  fact,  namely,  the 
reduction  in  the  price  of  the  product  and  the  con- 
sequent enlargement  of  the  demand  f  jr  it. 

How  Labor  may  be  displaced  from  a  (kneral  Group.  — 
The  amount  of  A'  that  can  be  created  depends  on  the 
amount  of  A  that  can  be  furnished  as  material  to  be 
transformed  into  A',  and  also  on  the  amount  of  A' 
that  will  be  taken  for  conversion  into  A".  This  again 
depends  on  the  amount  of  A"  that  will  be  accepted 
by  employers  at  .4'"  and  sold  in  this  last  form  to  the 
consuming  })ublic.  If  the  market  for  A'"  cannot 
be  much  increased  by  a  moderate  reduction  of  the 


n-   I    ^ 


IMPROVEMENTS    IN    METHODS 


265 


price  of  it,  some  labor  may  have  to  go  into  the  group 
of  B's  or  C's ;  and  in  any  case  there  must  be  new  labor 
in  A,  A",  and  A'"  if  the  product  of  A'  is  increased. 
We  can  now  measure  the  difference  between  the 
effect  of  the  adoption  of  an  improvement  first  by  one 
employer  and  much  later  by  others,  and  that  of  the 
quick  adoption  of  it  by  all.  In  this  latter  case  there 
is  not  much  delay  in  increasing  the  output  of  the  goods, 
and  the  market  for  them  does  not  have  time  to  grow 
larger  because  of  the  growth  in  the  numbers  and  the 
wealth  of  the  community.  Unless  the  present  mar- 
ket will  take  an  enlarged  quantity  of  the  finished  goods 
without  requiring  that  the  price  should  go  below  the 
new  cost  of  making  them,  some  labor  will  have  to 
leave  the  general  group. 

How  Pcsimts.  mu^  Cause  an  Increased  Displacement 
ofJ;^borers.  —  What  we  often  see  is  the  nearly  simul- 
taneous adoption  of  a  labor-saving  device  by  all  lead- 
ing employers  in  one  industry.  Something  like  this 
takes  place  when  the  makers  of  a  valuable  machine 
retain  the  patent  on  it  in  their  own  hands,  and  press  the 
sale  of  it  on  all  the  producers  who  have  use  for  it.  In 
this  case,  however,  the  makers  usually  put  the  price 
of  the  machine  at  a  figure  that,  while  it  affords  an 
inducement  to  buy  it,  does  not  reduce  the  cost  of  the 
goods  that  it  helps  to  make  enough  to  cause  a  great 
increase  in  the  demand  for  them.  The  owners  of  the 
patent  on  the  new  appliance  charge  for  it  "what  the 
traffic  will  bear";  and  until  the  patent  runs  out,  the 
users  of  the  machine  have  to  sell  their  goods  almost  at 
as  high  prices  as  before.  If  the  machine  enables  one 
man  to  do  the  work  of  a  dozen,  eleven  men  must  find 
other  things  to  do.  Thoy  could  find  tht-m  in  their 
own  industry  if  the  product  of  it  were  enlarged  in 


266 


ESSENTIALS   OF   ECONOMIC   THEORY 


consequence  of  the  use  of  the  machine;    but  if  the 
high  price  of  the  patented  machine  prevents  this,  they 
must  go  elsewhere.     When  the  patent  runs  out,  Ihere 
is  likely  to  be  a  considerable  enlargement  of  the  in- 
dustry, and  how  important  this  fact  is  we  shall  soon  see. 
How  Improvements  which  call  Labor  to  a  Particular 
Establishment  may  displace  Labor  from  a  Group.  — 
Another  typical   case  is  affordcfl   when   some    one 
employer  has  for  a  time  the  exclusive  use  of  a  labor- 
saving  device,  and  pushes  his  production  to  the  ut- 
most in  order  to  get  the  full  benefit  from  it.     Here  are 
seen  the  more  characteristic  effects  of  such  an  im- 
provement.    It  draivs  labor  to  the  employer  who  for 
the  time  being  monopolizes  the  new  instrument  of 
production,  but  it  turns  labor  from  the  subgroup  of 
which  this  employer  is  a  member.     He  enlarges  his 
output  and  in  time  tiiis  reduces  the  price  of  the  prod- 
uct.    In  the  field  there  are  marginal  mills,  or  those  so 
antiquated,  ill  situated,  or  badly  run  that,  with  their 
product  selling  at  the  former  price,  they  could  barely 
hold  their  own;   and  now  that  the  price  is  reduced, 
they  lose  money  by  running.     They  have  to  cease 
operating,  and  this  makes  practicable  a  further  en- 
largement of  the  product  of  the  efnci(>nt  mill.     Much 
labor  goes  thither,  but  some  part  of  that  which  leaves 
the  abandoned  mills  l)etakes  itself  to  other  subgroup.s. 
Not  often,  indeed,  does  it  have  to  go  to  other  general 
groups.    The  cheap  transformation  of  the  material 
A  into  A'  enlarges  the  market  for  A'  and  calls  for  more 
labor  at  .4,  and  it  involves  more  at  A"  and  A"\     If 
the  change  of  method  had  been  gradual,  the  growth 
of  the  social  demand  for  A'"  would  probably  have 
precluded  the  need  of  sending  any  labor  out  of  tlie 
entire  group  of  A's.    Even  a  rapid  change  often  sends 


IMPROVEMENTS    IN    METHODS 


267 


labor  out  of  one  subgroup  into  other  subgroups  of 
that  series  rather  than  into  other  general  groups. 

An  improvement  that  should  reduce  the  cost  of 
converting  leather  into  shoes  would,  by  the  sale  of  the 
shoes,  call  for  more  leather,  more  cattle,  more  appli- 
ances, more  tanning,  and  larger  buildings  for  shoe 
factories,  furnished  with  more  shoemaking  machinery 
and  greater  motive  power,  even  though  the  particular 
machines  which  were  improved  by  the  invention  had 
become  so  much  more  efficient  that  no  more  of  them 
were  needed.  This  depends  on  the  extent  to  which 
a  certain  reduction  of  cost  of  a  product  enlarges  the 
market  for  it. 

Principles  Governing  the  Enlargement  of  the  Effec- 
tual Demand  for  One  Commodity.  — In  determining 
how  much  a  reduction  of  the  price  of  a  single  article 
will  at  once  enlarge  the  market  for  it,  there  are  tw(i 
things  to  be  considered,  namely,  the  elasticity  of  th^ 
want  itself  to  which  the  article  caters,  and  the  extent 
to  which  an  article  catering  to  a  particular  want  may 
be  substituted  for  other  articles  designed  to  satisfy 
the  same  one.  The  desire  for  jewels  and  other  articles 
of  personal  adornment  is  very  expansive,  and  a  fall  in 
the  price  of  any  one  article  of  this  kind  causes  a 
relatively  large  increase  in  the  consumption  of  it. 
Since  the  want  to  which  a  costly  ornament  caters  is 
thus  elastic,  the  cheapening  of  all  articles  that  cater 
to  this  want  would  enlarge  the  consumption  of  all  of 
them.  The  cheapening  of  a  particular  one  of  these 
articles,  if  there  were  in  the  market  many  others  of 
the  same  general  kind,  would  cause  that  one  to  be 
extensively  used  in  preference  to  the  others.  By  an 
enlargement  of  the  total  amount  of  decorative  articles 
used  and  by  a  relative  favoring  of  a  particular  one  of 


,       ! 


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irvK<vjV       £ap4V«^dB9"     AB■ll»^^OW 


268 


ESSENTIALS   OF    ECONCMIC  THEORY 


them  at  the  cost  of  others,  the  sale  of  that  one  would 
be  doubly  increased.  Cheaper  diamonds  might  mean 
an  increased  use  of  them  without  any  large  reduction 
in  the  use  of  other  gems;  but  if  many  other  gems 
happened  to  be  available  for  the  purposes  sub- 
served by  the  diamonds  the  use  of  these  others  would 
be  curtailed  and  that  of  diamonds  would  be  dispro- 
portionately increased. 

The  Value  of  Good.f  as  affected  by  the  Existence  of 
Castes.  —  One  of  the  reasons  why  the  market  for  jewels 
is  thus  elastic  is  the  fact  that  they  serve  as  badges  of 
caste,  as  only  something  of  large  cost  can  do.  If, 
therefore,  all  gems  were  to  become  much  cheaper, 
two  things  would  happen:  (1)  relatively  poor  people 
j  would  buy  some  of  them  —  partly  in  lieu  of  imitations 
I  and  of  cheaper  real  jewels ;  and  (2)  rich  people  would 
I  have  to  buy  more  and  costlier  ones  than  were  formerly 
needed,  in  order  to  retain  their  positions  in  the  social 
gradations.  This  principle  affects  the  consumption  of 
a  wide  range  of  articles,  the  possession  of  which  seems, 
outwardly  at  least,  to  stamp  the  owners  as  belonging 
in  a  certain  stratum  of  society.  It  increases  the  de- 
mand for  fine  clothing,  furnishings,  and  equipage, 
multiplies  social  functions,  and  indv.ces  participation 
in  all  manner  of  costly  diversions.  The  elasticity 
of  the  market  for  luxurious  goods  is,  in  general, 
greatly  increased  by  the  action  of  this  motive.  The 
ch(>apening  of  them  causes  them  to  be  consumed  by 
the  lower  classes  and  renders  the  use  of  greater  quan- 
tities or  higher  qualities  of  them  a  social  necessity 
for  the  higher  classes.* 

'  It  is  also  true  that  an  entire  variety  of  gems  or  other  things 
of  this  genus  might,  by  mere  cheapness,  be  branded  as  too  com- 
mon to  be  used  by  the  very  wealthy,  except  for  new  emd  in- 
ferior  modes  of  adornment. 


IMPROVEMENTS    IN    METHODS 


269 


We  shall  soon  see  that  a  reduction  in  the  cost  of  any 
one  article  usually  causes  the  use  of  it  to  trench  on 
that  of  all  manner  of  things  which  are  on  the  margin 
of  consumption  and  are  not  similarly  che.'ipened. 

Cluinges  of  Cost  of  Different  Goods  Never  Uniform.— 
The  cost  of  all  articles  is  never  reduced  at  the  same 
tinr.e,  and  it  is  impossible  that  all  of  them  should  re- 
main in  the  same  order  of  desirability  in  the  estima- 
tion of  purchasers.  Many  things,  however,  are  often 
cheapened  at  the  same  time,  though  in  liifferent 
degrees.  Whatever  furnishes  a  very  common  raw 
material  at  a  lower  cost  than  has  prevailed,  as  did 
the  invention  of  the  Bessemer  process  of  steel  making, 
makes  everything  into  which  that  material  enters 
cheaper.  By  reducing  the  cost  of  railroads  and 
engines,  cars  and  steamships,  the  Bessemer  process 
indirectly  lowered  the  prices  of  goods  that  have  to  be 
carried,  which  means  practically  everything.  A  cheap 
motive  power  acts  in  the  same  way  and  lowers  the 
costs  of  producing  an  unlimited  number  of  goods. 
Even  in  the  case  of  such  general  improvements  as 
this  the  reductions  of  price  are  not  uniform.  Some 
goods  are  affected  more  than  others.  Cheap  steel 
lessens  the  cost  of  bridges  more  than  it  does  that  of 
dwelling  houses,  and  in  the  case  of  many  improve- 
ments the  effect  is  confined  to  a  limited  class  of  prod- 
ucts, if  not  to  a  single  one. 

How  the  Disturbing  Effect  of  a  Single  Improve- 
ment is  Limited.  —  In  the  case  of  consumers'  goods 
improvements  are  going  on  so  nearly  incessantly 
and  at  so  many  points  that  the  effect  is  much  the 
same  as  if  every  invention  cheapened  most  of  them 
at  once.  Harmful  disturbances  are  reduced  to 
minute  dimensions  by  the  multiplying  of  the  changes, 


*  i 


I 


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i        '    f' 


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It 


I? 


270 


KS8ENTIALS   OF    ECONOMIC   THEORY 


each  of  which,  if  it  occurred  alone,  would  produce 
a  hurtful  elTect.     Many  inventions  cancel  one  an- 
other's unfavorable  effects  in  a  way  that  we  shall 
later  examine.     What   we   now   have   to  do   is   to 
isolate  a  single  productive  change  and  see  whether 
there  are  forces  working  to  reduce  its  own  independ- 
ent  power  to  create  incidental  disturbance.     What 
limits  the  power  of  a  single  new  and  economical 
process    to    eject    laborers    from    their   accustomed 
places  of  employment?    This  question  cannot  here 
be  answered  in  detail,   but  a  brief  statement  will 
cover   the   general    principles   involved.     Obviously 
the  displacement  varies  inversely  with  the  extent 
to  which  increased  cheapness  enlarges  the  consump- 
tion of  the  article  affected.     If  by  making  one  thou- 
sand men  produce  as  much  of  the  commodity  as 
two    thousand   formerly    produced,  you    so    reduce 
costs  as  to  double  the  consumption  of  the  article, 
you  keep  all  the  men  who  formerly  made  it  in  their 
accustomed  places  of  en-ployment.    The  elasticity 
of  the  want  itself  to  which  the  article  caters  is  one 
of  the  two  elements   that  determine  the   increase 
in  the  consumption  of  it;    but  when  this  increase 
is  due  to  an  extensive  substitution  of  this  article 
for  others  in  the  purchasing  lists  of  the  consuming 
public,  the  result  is  greatly  to  reduce  the  displace- 
ment of  labor  which  the  new  and  economical  method 
of  production  entails.    Such  substitutions  are  very 
general  and  are  a  large  factor  in  rescuing  men  from 
the  hardship  of  being  forced  out  of  the  employments 
they  are  used  to. 

On  what  an  Enlarging  Market  for  Tools  and  Raw 
Materinh  Depends.  -  The  maiJiCl  for  raw  tnateriais 
and  tools  depends  on  that  for  consumers'  goods  in 


--Y#^J*r«/i."i ■'"..  i'A* -^ '-rOy::-; 


IMPROVEMENTS    IN    METHODS 


271 


1  ' 


their  completed  state.  If  A,  the  raw  material, 
enters  only  into  A'",  it  can  he  sold  in  inereasing(iuan- 
titiea  only  as  A'"  is  thus  sold.  The  ••hicf  fact  alxjut 
tools  and  materials  is  that  they  may  contribute  to 
a  larj,'e  number  of  completed  •,'<)<'< Is,  and  the  .sif,mifi- 
cance  of  this  fact  we  shall  .soon  see.  The  ultimate 
power  to  find  a  market  for  all  products  of  the  lower 
subgroups  depends  on  finding  one  for  the  products 
of  the  uppermost  ones  — the  A'",  B'",  and  C"  of 
our  table.  The  laws  which  govern  the  market 
for  finished  goods  of  declining  cost  have  first  to  be 
studied. 

The  Effect  of  Substituting  one  Consumers'  Good 
for  Others.— Reducing  the  cost  of  everything  would 
cause  an  absolute  increase  in  the  consumption  of 
everything;  but  reducing  the  cost  of  a  single  thing 
always  causes,  as  we  have  seen,  a  relative  increase 
in  the  consumption  of  that  one  product.  While 
the  demand  for  other  articles  may  not  grow  ab- 
solutely less,  it  becomes  relatively  less  because  of 
the   comparative    cheapness   of   the   one   product.* 

•  It  is  worth  noticing  (1)  that  uniformly  reducing  the  cost 
of  everything  would  cause  comparative  changes  in  consump- 
tion. Anything  which  should  take  away  a  quarter  of  the 
cost  of  every  article  in  the  entire  list  of  social  products  would 
mcrease  the  consumption  of  some  articles  more  than  it  would 
increase  that  of  others.  There  is  an  extremely  theoretical 
case  in  which  there  might  even  be  a  lessening  of  the  effectual 
demand  for  a  few  things  because  a  uniform  reduction  of 
twenty-five  per  cent  would  cause  other  things  to  be  exten- 
sively substituted  for  them.  This  thinkable  possibility  is 
not    practically    important. 

A  detailed  study  would  show  (2)  that  a  reduction  in  the 
cost  of  any  single  article  in  the  entire  list  of  social  products 
causes  an  increase  in  the  consumption  of  mmmndities  in 
general.  As  an  isolated  man  who  has  had  to  work  hard  for 
mere  food  and  content  himself  with  a  few  comforts  and  no 


1 


272 


ESSENTIALS  OF  ECONOMIC  THEORY 


t 


A  substitution  of  one  article  for  another  in  the  lists 
of  goods  used  by  the  public  is  a  universal  phenom- 
enon attending  an  improvement  which  affects  the 
production  of  one  article  only.  When  the  coat  of 
A'"  causes  it  to  stand  just  outside  of  the  purchase 
limit  of  a  large  class  of  persons,  a  moderate  reduction 
in  the  cost  of  it  will  make  it  a  more  desirable  sub- 
ject of  purchase  than  the  articles  which  have  stood 
just  within  that  limit,  and  it  will  be  bought  inst»'ad 
,  of  one  or  more  of  these  things.  The  securing  of 
new  customers  for  a  finishctl  product  by  means  of 
a  fall  in  the  price  of  it  is  largely  brought  about  by 
such  substitutions.  When  the  new  article  is  added 
to  a  consumer's  list,  the  one  which  has  stood  as  his 
marginal  or  least  desirable  purchase  is  taken  off 
from  it.  It  is  the  relative  desirability  of  buying 
one  or  the  other  of  these  articles  that  influences 
a  buyer  in  his  decision  between  them,  and  that 
cannot  fail  to  be  changed  by  anything  that  lowers 
the  cost  of  one,  leaving  that  of  the  other  unchanged. 
If  the  cost  of  a  unit  of  earli  of  ten  articles  lie  rep- 
resented by  the  lines  falling  from  the  letters  A, 
B,  C,  etc.,  to  the  base  of  the  figure,  a  considerable 
fall  in  the  cost  of  A  would  put  it  below  the  cost  of 
each  of  the  other  articles  represented.  If  in  the 
ca.se  of  a  large  class  of  persons  who  did  not  formerly 
buy  any  of  the  A  it  is  as  desirable  as  any  of  these 
goods,  it  will  take  its  place  as  the  most  desirable 
subject  of  purchase  instead  of  the  leasi    lesirable. 


luxuries  will  indulge  in  luxuries  when  food  production  becomes 
much  easier,  so  society  as  an  organic  whole  will  increa.se  its 
indulg(>nces  all  along  the  line  whenever  the  work  of  uetting 
any  one  thing  is  reduced  and  some  working  time  is  thus 
liberated. 


m^-mms:^^^m 


IMPROVKMKNT8    IN    METHODS 


273 


^  I. 


Those  whoso  availahl..  means  cnahlf.!  thorn  to  ac- 
quire all  th..  artiolos  fn„n  ./  to  li  iru-lusive.  but  did 
not  suffice  for  .1,  will  n,>w  take  the  .1  and  on.it  the 
/^.  Ihose  whose  ae(|uisitions  st()i)ped  with  C  will 
substitute  A  for  that  artieh",  and  in  general  every 
buyer  of  any  .,f  theso  thing's  who  has  not  hereto- 
fore ae,,UMvd  .1  will  now  put  this  in  the  place  of 
the  one  which  it  was  least  worth  while  to  ac(,uire 


SubstiUitimis  caused  by  a  Cheapening  of  one  Utility 
m  an  Article  which  is  a    Composite  of  Several  — 
VVhen  different  goods  cost  unlike  amounts  but  are 
objects  of  equally  strong  dosires,  only  one  of  them 
IS  a  marginal  purchase,  and  the  others  afford  a  per- 
sonal  gain  to  the  consumer  which  is  not  oPset  by 
a  cost.    We  have  seen  that  this  rule  applies  to  the 
different  utilities  in  a  single  good.     In  the  case  of 
every  article  several  grades  of  which  are  sold,  there 
Js  one  component  element  or  one  utility  which  is 
worth  to  the  buyer  exactly  what  it  costs,  while  the 
others  afford  a  consumers'  surplus.     If  the  letters 
m   the  diagram   rei)resent,  not   whole   articles,  but 
utilities  in  articles,  as  discussed  in  Chapter  VI    it 
will    accurately    e.xi)ress    the    essential    facts    'in 
such   cases,   which  are   very   numerous,   it   is  only 
necessary  to  reduce  the  price  of  the  one  utility  which 
IS  now  just  worth  its  cost  in  order  to  induce  more 


o 


274 


ESSENTIALS   OP  ECONOMIC  THEORY 


consumers  to  buy  the  grade  containing  this  utility, 
instead  of  a  lower  grade  of  the  same  thing.  In 
doing  this,  they  forego  the  purcliase  of  something 
else  altogether,  or  content  themselves  with  a  lower 
grade  of  that  other  connnotlity.  If  jeweled  watch 
cases  should  become  cheaper,  some  persons  would 
substitute  them  for  plain  cases  and  would  forego 
buying,  say,  pictures  which  were  just  within  their 
purchase  limit,  or  would  content  themselves  with 
cheaper  pictures.  This  taking  of  one  thing  within 
the  margin  of  consumf)tion  and  discarding  others 
is  far  less  frequently  done  than  is  the  taking  of  a 
lower  grade  of  one  kind  of  goods  for  the  sake  of 
securing  a  higher  grade  of  anothc. 

Why  Substitutions  reduce  the  Displacements  of 
Labor.  —  The  question  will,  indeed,  arise  why  the 
burdan  caused  by  the  change  mav  not  be  merely 
transferred  to  men  in  industries  tlie  products  of 
which  are  displaced  by  the  substitution.  Some- 
thing of  this  kind  would  occur  if,  in  consequence 
of  the  cheapening  of  one  article,  any  one  other  were 
generally  discarded.  The  important  fact  is  that  it 
is  not  any  one  thing,  but  a  wide  range  of  things 
which  are  consumed  in  smaller  quantities  m  con- 
sequence of  the  change ;  and  the  effect  on  the  makers 
of  any  one  of  them  is  small.  If  a  thousand  men 
begin  to  buy  the  A'"  of  the  table  we  have  frequently 
used,  some  of  them  will  forego  B'",  some  C",  and 
so  on  through  the  list;  and  the  market  for  no  one 
of  these  things  will  be  much  affected.  Moreover, 
the  nearly  universal  fact  is  that  a  man  who  begins 
to  buy  one  article  that  he  never  before  used  will 
save  tl.e  price  of  it  by  contenting  himself  with  a 
slightly    cheaper   quality    of   a   number   of   others. 


IMPROVEMENTS    IN   METHODS  275 

He  will  give  up  a  dozen  utilities  in  as  many  entire 

;  comniodities  in  (jrdor  to   be  able  to   buy  the  one 

/  entire  commodity  that  he  adds  to  his  purchasing 

.    list.    The   reduction   of   demand   is   so   extensively 

:    subdivided  that  it  causes  relatively  few  displacements 

of  labor. 

Subslitidion  a  Prominent  Cause  of  Varying  Sales 
0/ 6W/s.  — Substitution  is,  then,  the  general  rule 
whenever    the    cheapening    of    a    commodity    wins 
new  purchasers  of  it.    Th.s  practice  is  not  indeed 
universal  in  the  case  of  tho.se  who  formerly  con- 
sumed these  goods.     Former  purchasers  of  an  article 
which  has   become  cheaper  may  make  no  change 
except  to  buy  more  of  it  or  a  better  quality  of  it 
for  the  same  amount  which  they  have  been  accus- 
tomed to  spend  for  the  inferior  quality.     They  are 
not  then  obliged  to  economize  in  any  other  direction, 
and  the  change  docs  not  trench  on  their  consump- 
tion of  other  goods.     On  the  other  hand,  it  is  some- 
tunes  the  case  that  they  continue  to  use  the  original 
amount  of  the  article  that  has  become  cheaper  and 
use  the  liberated  means  of  purchase  — the  "money," 
as  it  would  ordinarily  be  termed  —  in  buying  other 
goods.    The  cheapening  of  A'"  thus  even  enlarges 
the  deman.l  for  13'",  C",  etc.    There  are  thus  two 
cases  m  which  a  reduction  in  the  cost  of  one  thing 
would  not  decrease  the  use  of  other  things. 

Substitution  More  General  in  the  Case  of  New  Con- 
sumers.-The  substitution  of  a  cheapened  article 
for  others  is  the  dominant  fact  in  the  case  of  new 
consumers  of  such  an  article,  while  an  increased 
consumption  of  other  things  sometimes  occurs  in 
the  case  of  old  consumers.  This  does  nut  have  as 
large  commercial  effects  as  the  other  change.    If 


i    I 


^   : 


i 


i 


if 


mm^4 


276 


ESSENTIALS   OF   ECONOMIC   THEORY 


we  produce  cheaper  shoes,  we  make  it  easier  to  ac- 
quire good  ones,  and  those  who  formerly  contented 
themselves  with  an  inferior  kind  take  a  better  one. 
That  means  that  they  add  to  their  purchase  lists 
the  higher  utility  which  is  present  in  the  one  grade 
and  absent  in  the  other.  They  buy  a  new  element 
in  goods  rather  than  more  of  those  goods,  and  v.hile 
they  may  not  always  change  their  consumption 
of  articles  of  other  kinds  they  more  frequently  do 
.so.  Those  who  begin  to  use  something  which  for- 
merly they  went  without  altogether  usually  give 
up  the  use  of  some  good  or  some  quality  in  it,  or 
get  on  with  a  smaller  quantity  of  it  in  order  to  make 
the  new  indulgence  practicable.  The  man  who, 
when  bicycles  became  cheap,  bought  the  first  one  he 
ever  owned  probably  gave  up  some  other  gratification. 

How  the  Sale  of  Goods  which  wear  ouf  in  the  Us- 
ing increases  as  the  Price  Falls. —  When  goods 
deteriorate  as  they  grow  older,  users  have  to  buy 
new  ones  often  if  they  are  not  willing  to  use  those 
which  are  worn  out  and  inferior.  If  we  want  always 
to  wear  clothes  of  good  quality,  we  refrf.in  from 
wearing  a  suit  too  long.  We  discard  many  things 
when  they  have  somewhat  deteriorated,  and  this 
forces  us  to  buy,  in  a  term  of  years,  a  larger  number 
of  them  than  we  should  otherwise  do.  We  discard 
carpets  and  upholstery  early  when  they  are  so  cheap 
that  we  can  afford  to  do  so.  We  thus  improve  our 
goods  qualitatively  by  adding  to  them  quantitatively. 

Substitutions  a  Protection  for  Labor  against  Undue 
Displacements.  —  Now,  not  only  are  the  substitutions 
we  have  cited  of  commercial  importance,  but  they 
act  in  the  direction  of  retaining  labor  in  a  group 
where  "labor  saving"  has  been  effected.    They  help 


IMPROVEMENTS    IN   METHODS 


277 


to  prevent  this  process  from  being  equivalent  to 
labor  expelling  in  so  far  as  either  a  general  group 
or  a  subgroup  is  concerned,  since  they  increase 
the  social  demand  for  the  products  of  the  group  in 
question  and  cause  a  relative  diminution  of  the 
demand  for  other  things.  Quite  evidently  there 
is,  for  these  reasons,  the  more  need  for  labor  within 
this  group  and  less  nootl  of  it  elsewhere.  Cheap 
shoes  may  thus  never  mean  fewer  shoemakers  and 
cheap  watches  may  not  ever  mean  fewer  watch- 
makers. 

Substitutions  of  One  Capital  Good  for  Others.  —  It 
is  not  merely  in  the  realm  of  consumption  that  the 
demand  for  a  particular  good  may  increase  greatly 
in    consequence    of    cheapness.    The    same    thing 
happens  in  the  realm  of  production,  but  here  the 
substitution  of  one  thing  for  others  is  an  even  more 
prominent  cause  of  the  increased  use  of  the  partic- 
ular commodity.     Aluminum  ami  copper  are  rivals 
as  carriers  of  electrical  power,  with  the  advantage 
at  present  somewhat  in  favor  of  copper.    As  soon 
as  the  cost  of  making  aluminum  shall  be  reduced 
by  a  moderate  fraction  it  will  become  the  cheaper 
material  for  such  uses  and,  unless  there  is  a  fall  in 
the  price  of  copper,  will  thrust  itself  into  use  for 
trolley   wires   and   other   conductors   of   electricity. 
The  possession  of  an  enormous  market  by  the  one 
or  the  other  material  depends  on  their  relative  costs, 
and  these  may  easily  so  change  as  to  transfer  most 
of  the  demand  fiotn  the  one  material  to  the  other. 
A  further  fall  in  the  cost  of  aluminum  would  make 
it  available   for  sheathing  the   hulls   of  ships   and 
would  bring  it  into  gen(>ral  use  for  many  household 
implements,  while  a  sufficient  fall  would  make  it 


m 


jj/^ 


a 


\l 


If  I 


i; 


278 


ESSENTIALS  OF   ECONOMIC  THEORY 


a  leading  building  laterial  and  give  it  a  limitless 
market  for  the  frammg  and  finishing  of  substantial 
structures.  In  those  various  uses  it  would  sub- 
stitute itself,  not  only  for  copper,  but  for  steel,  stone, 
wood  and  other  materials,  and  the  change  would 
be  extensive  enough  to  g.  f;  it  an  enormous  market 
without  requiring  a  correspondingly  great  reduction 
in  its  cost.  Lowering  the  cost  of  aluminum  by  a 
third  might,  by  merely  making  it  the  favorite  carrier 
of  electricity,  multiply  the  present  use  of  it  l)y  ten, 
and  lowering  it  by  two  thirds  might  multij)ly  the 
present  use  of  it  by  a  hundred.  If  this  should 
take  place,  saving  labor  would  be  anything  rather 
than  expelling  it  from  its  position  in  the  aluminum- 
making  group,  ^^'hen  less  labor  came  to  be  needed 
for  making  a  ton  of  the  metal,  more  labor  would  be 
used  in  the  industry  that  makes  it. 

So  long  as  the  substitution  caused  by  the  cheapen- 
ing of  aluminum  affected  copper  only  it  might  be 
a  serious  matter  for  the  producers  of  copper;  but 
when  it  came  to  replacing  in  some  degree  steel, 
stone,  brick,  wood,  and  other  materials,  the  effect 
would  be  so  diffused  and  subdivided  as  to  create 
small  disturbances  in  any  one  of  these  industries. 

Effects  of  Reduced  Cost  of  Materials  which  al- 
ready enter  into  Many  Finished  Products.  —  In  the 
case  of  ahmiinum  the  prospect  of  a  greatly  increased 
market  brings  with  it  the  probability  that  it  may 
come  to  be  a  component  element  of  products  into 
which  it  does  not  at  p  -esent  to  a  great  extent  enter. 
Such  things  as  steel,  si  >ne,  and  wood  already  con- 
stitute important  components  of  more  articles  than 
can  be  counted,  and  there  is  no  great  prospect  that 
they  will  enter  into  a  much  greater  variety  of  prod- 


Jti 
PI 


IMPROVEMENTS   IN    METHODS 


279 


ucts.  In  the  case  of  these  materials  there  is  a 
prospect  that  cheapness  will  show  itself  in  reduced 
costs  of  the  finished  goods  that  are  made  of  them, 
and  that  these  finished  goods  will  be  used  in  greater 
quantities  without  substituting  themselves  for  other 
things  in  so  drastic  a  way  as  that  which  we  have 
described  in  the  case  of  aluminum.  A  reduction 
in  the  cost  of  steel  would  indeed  bring  about  a  sub- 
stitution of  that  material  for  others  at  every  point 
where  the  steel  and  something  else  are  now  on  a 
plane  in  desirability.  The  type  of  building  that  now 
is  made  with  plain  brick  walls  and  wooden  floors, 
because  that  cheap  mode  of  building  enables  it  to 
earn  a  slightly  larger  interest  on  its  cost,  would 
often  be  made  with  a  steel  frame  and  concrete  floors. 
At  every  such  marginal  point  steel  would  gain  some- 
what on  its  rivals  in  the  extent  to  which  it  would 
be  used;  but  in  addition  to  tliis  enlargement  of 
the  market  for  it  by  substitution,  one  might  count 
on  an  increase  in  the  use  of  it  because  of  an  increase 
in  the  use  of  very  many  things  that  are  already 
made  of  it.  Some  of  these  cater  to  highly  elastic 
wants,  and  persons  who  use  a  quantity  of  them 
may  be  induced  to  use  more  without  discarding 
anything  else.  Such  an  absolute  enlargement  of 
consumption  is  highly  probable  in  the  case  of  any 
material  that  enters  into  a  vast  number  of  products, 
and  this,  together  with  the  enlargements  that  come 
by  substitution,  may  suffice  to  create  a  great  demand 
for  the  raw  material  and  call  for  as  much  laljor  in 
the  subgroup  that  makes  it  as  was  used  before 
the  improvement  was  made.  In  the  case  of  the 
raw  materials  of  industry  the  resources  for  gaining 
an  increased  market  by  substitution  are:  — 


1 

1; 

[■;,iJ 


mmmmm 


m 


,-*^ 


:: 


280 


ESSENTIALS    OP   ECONOMIC   THEORY 


Iff  i 


I'M 
"f  ! 

II 


(1)  The  substitution  of  the  material  for  others 
in  uses  different  from  those  in  which  it  is  now 
employed ; 

(2)  The  substitution  of  it  for  other  mftterials  in 
the  marginal  parts  of  its  present  field,  where  it  is 
already  nearly  as  available  as  other  things; 

(3)  The  substitution  of  the  finished  consumers' 
goods  made  of  it  for  other  consumers'  goods. 

In  addition  to  all  these  there  is  the  direct  increase 
in  the  use  of  finished  goods  wholly  or  partly  made 
of  the  material  by  persons  who  ilo  not,  for  this 
reason,  discard  any  other  goods. 

This  statement  places  the  different  influences  in 
the  order  of  their  relative  efficiency  in  the  majority 
of  cases  in  which  they  act. 

Effects  of  cheapening  Tools  of  /nrfj/.s/ry.  —  What 
is  true  of  a  raw  material  which  enters  into  many 
completed  products  is  true  of  the  tools  of  intlustry 
which    are    used    for    many    purposes.    A    turning 
lathe,  a  planing  machine,  or  a  circular  saw  helps 
to  make  a  large  number  of  products,  and  the  as- 
sertions we  have  made  concerning  steel,  stone,  or 
wood  apply  to  it.    As  it  becomes  cheaper  it  gains 
an  enlargement  of  its  market  by  a  combination  of 
the  four  influences  just  enumerated.    It  is  brought 
into  new  uses,  is  employed  more  in  its  present  mar- 
ginal uses,  and  is  required  in  greater  quantity  be- 
cause its  products  are  substituted  for  other  things 
and  are  also  required  in  greater  amounts  independ- 
ently of  these  substitutions. 

Cheap  Motive  Forces.  —  Motive  power  is  so  nearly 
universal  in  its  applications  that  developing  a  cheap 
source  of  it  is  much  like  improving  the  method  of 
producing    everything    and    securing    a    universal 


L^^ir- 


IMPROVKMKNTS    IN    METHODS 


281 


increase  of  products.  We  shall  see  why  such  a 
general  eniarKf-ment  of  the  output  of  all  the  shops 
creates  no  (Ji.«placements  of  labor  which  entail  hard- 
ships. If  the  power  i.s  used  more  in  the  upper  sub- 
groups than  in  the  lower  ones,  — if  it  is  more  fre- 
quently available  for  fashioning  raw  materials  than 
for  producing  them  through  agriculture  or  mining,  — 
the  development  of  it  checks  in  some  degree  llie 
drift  of  lalKjr  from  the  lower  subgroups  toward 
the  upper  onr^i,  which  has  been  referred  to  in  an 
earlier  chapter. 

Utilizing  the  power  of  Niagara,  that  of  Alpine 
torrents  and  other  unased  streams,  that  of  the 
waves  of  the  sea,  and  that  which  has  long  slumbered 
in  the  culm  heaps  of  coal  mines,  will  give  increased 
facility  for  profJucing  nearly  everything;  and  though 
the  amount  of  the  enlargement  of  output  will  vary 
in  different  cases  and  some  effect  on  the  movements 
of  labor  will  be  proflucefl,  few  serious  hardships  will 
result,  and  a  majority  of  the  persons  who  will  suffer 
from  these  changes  at  all  will  get  an  offsetting  benefit 
from  the  enlarging  productiveness  of  industry. 


/■-!■ 


I 


li 


m 
If 


CHAPTER  XVII 

FURTHER    INFLUKNCE8    WHICH    REDUCE   THE    HARD- 
SHIPS   ENTAILED    BY    DYNAMIC   CHANGES 

In  the  absence  of  an  unusually  great  increase  in 

the   consumption   of    an   article    the   improvement 

which  reduces  the  cost  of  it  tends  to  displace  labor. 

The  first  thing  that  will  occur  to  any  one  who  looks 

for  influences   which  mitigate  this  evil  is  the  fact 

that  economical  changes  are  going  on  at  nearly  all 

points   in   the   system,  and    that    this  cancels  out 

most    of    the    displacing    influence.      If    something 

sends  men  from  the  group  A  to  groups  B  and  C, 

while  something  else  sends  them   from  the  group 

B  to  groups  A  and  C,  and  still  another  influence 

impels  men  from  C  to  -4  and  B,  there  is  likely  to  be 

very  little  actual  moving.    A  question  will  in  such 

I  a  case  arise  as  to  whether  tlic  three  movements  may 

I    not  expel  labor  from  all  the  groups  and  remand  them 

:    to  a  state  of  idleness.     History  is  clear  in  the  answer 

'    it  gives  to  this  question;   such  a  result  has  not  oc- 

\  curred,  and  at  the  end  of  a  century  of  brilliant  me- 

.'  chanical  progress  the  amount  of  enforced  idleness 

t  is  not  greater  than  it  was  at  the  outset.     It  remains 

to  show  that  economic   law  precludes  a  universal 

(lisi)lacement  and  insures  laborers  for  all  time  against 

being  at  the  mercy  of  an  industrial  system  which  has 

nowhere    any    need    of    their   services.     Productive 

devices  widely  introduced  mean  great  and  general 

282 


=.£Sse:Li&3^TS^£ata&; 


jimo" II  >  I  i  I  1  iiHwiiiriiMiiiii<iiii"iii  iniiMiBiff'ivi'iii  lii  art 


LABOR    AND   GENERAL   PROnRESS 


283 


gains  and  comparativrly  little  cost.  They  mean 
what  on  their  face  they  ought  to  mean,  more  com- 
forts and  loss  toil  for  everylxxly.  Before  studying 
this  influence  —  the  reciprocal  action  of  improvemt-nts 
scattered  through  the  general  economic  system  —  we 
have  to  rletcrmine  the  action  of  one  or  two  other 
influences  which  also  lessen  the  disturbances  which 
progress  causes. 

One  can  see  that  the  quick  adoption  of  an  economi- 
cal device  in  ever>'  shop  of  a  subgroup,  at  a  time  when 
all  other  industrifs  are  in  a  stationary  state,  would 
usually  expel  .some  labor  from  that  one.  If  consumers 
should,  on  a  largo  scale,  substitute  the  product  of 
this  subgroup  for  that  of  others,  it  might  .'^ave  the 
situation;  but  tho  general  fact  is  that  the  consump- 
tion of  the  cheapened  product  mu.st  increase  in  a 
ratio  that  is  greater  than  the  ratio  representing 
the  saving  of  labor  used  in  making  it,  in  order  to 
prevent  displacement  of  labor.  If  we  got  on  with 
two  thirds  of  the  labor  which  the  making  of  tlie 
commodity  out  of  raw  materials  formerly  required, 
we  do  not  .save  two  thircls  of  the  total  expense  of 
making  the  fini.shed  article:  and  yet  to  retain  all 
the  labor  that  is  now  in  tho  busino.'js  we  must  sell 
one  and  a  half  times  the  former  number  of  the  goods 
produced.' 


'  The  mathematical  problem  stands  thus :  If  all  the  sub- 
groups of  the  .4  series  have  the  same  amounts  of  labor  and  .i 
machine  enables  a  half  of  the  force  now  in  A"  to  do  .ill  that 
is  required  in  transmuting  the  usual  supply  of  A'  into  the 
usual  amount  of  .4",  then  some  of  the  labor  in  A"  would  in 
most  cases  betake  itself  to  entirely  different  industries.  The 
superfluous  labor  at  A"  would  amount  to  an  eighth  of  all 
the  labor  required  for  the  complete  creation  of  A'".  If  wages 
constituted  the  only  cost  which  the  entrepreneur  must  defray, 


284 


ESSENTIALS   OP   ECONOMIC  THEORY 


Counteracting  In/luences.  —  The   importanco  of  a 
gradual  introduction  of  an  improvement  rather  than 
a  rapid  one  lies  in  the  fact  that  it  permits  these  influ- 
ences to  do  their  work  and  often  to  render  the  actual 
moving  of  laborers  even  from  their  subgroup  unneces- 
sary.   Time  is  the  salvation  of  the  laborer  menaced 
by  an  impending  displacement  from  his  field.    When 
we  see  what  is  the  grand  resultant  of  all  the  dynamic 
mfluences  we  are  studying,  we  shall  see  how  this 
neutralizing  and  canceling  of  the  labor-expelling  force 
takes  place.     But  for  them  one  isolated  change  would 


ft  I 

It 


nri 


the  price  of  A'"  would  be  redured  to  seven  eighths  of  the 
former  price,  and   this  nuRht,  in  the   case  of   some   R.wd.s 
enlarge  the  demand  t„  eight  sevenths  of  its  former  amount 
and  so  keep  all  the  labor  in  the  general  group.     Since  there  are 
outlays  to  be  met  besides  wages,  this  reducing  of  wa^es  by  an 
eighth   would  not  usually  reduce   total  cost  by  more  than 
about  a  twelfth,  and  even  if  price  quickly  went  down  to 
eleven  twelfths  of  its  former  amount,  it  would  be  too  much 
to  expect  that  the  consumption  of  the  A'"  should  increase 
by  a  seventh,  except  in  cases  in  which  this  amount  of  re- 
duction of  price  caused  A'"  to  take  the  place  of  B'"   C" 
etc.,  in  the  purcha.se  lists  of  many  consumers.    The  eniarjre^ 
ment  of  consumption  would  have  to  take  place  in  a  ratio 
greater  than  that  which  represents  the  saving  in  cost     Cost- 
ing eleven  twelfths  as  much  as  before,  the  article  must  sell 
eight  sevenths   as   freely -which   is   possible  only  when  it 
thrusts  Itself  extensively  into  the  place  of  other  consumers' 
good.s^    Even  then  some  labor  would  have  to  move  from  A" 
to  other  subgroups  of  the  .series.     One   half  of  the  amount 
of  labor  formerly  at  A"  does  the  whole  work  formerly  done 
there,  .and   to  keep  it  all   at  work   at   that  point  would   re- 
quire  th.at   the   output  from   the   whole  group  be  doubled, 
having  one  twelfth  in  co,st  could  not  well  in.sure  selling  double 
the   amount   of  goods.     In    this   view   improvements   would 
have  a  threatening  look,  though  their  ultimate  effect  would 
fh!    1^^'l!'\^'^'^''^-^   ^'^  ^ver,   wore   it  not   for  the  fart 
that  the  disturbances  that  result  from  them  are  made  to  be 
relatively  small  by  the  influences  we  are  studying 


LABOR    AND   GENERAL    PROGRESS 


285 


tend  to  expel  laljor  from  its  subgroup  and  would 
nearly  always  send  it  away  from  the  point  within 
an  establishment  where  the  new  device  is  introduced. 
It  usually  attracts  labor  to  this  establishment  and 
away  from  the  inefficient  or  marginal  ones.  A  grad- 
ual adoption  of  the  improvement  allows  time  not 
only  for  a  general  increase  in  the  size  and  the  w(>alth 
of  the  community,  but  for  other  influences  which  act 
more  quickly  and  in  practice  make  it  nearly  always 
unnecessary  to  reduce  the  total  amount  of  labor  in 
an  industry  which  produces  an  article  in  permanent 
demand.  Statistics  may  be  confidently  appealed 
to  in  support  of  this  general  statement. 

The  Dynamic  Law  of  Price  and  i7.s  Effects.  —  We 
briefly  noted  in  passing  that  the  price  of  a  product 
the  making  of  which  is  subject  to  repeated  improve- 
ments naturally  tends  toward  tlw  cost  of  it  in  the 
establishment  having  the  late..  lethod  and  the 
greatest  facilities  for  production.  The  natural  price 
at  any  time  is  the  cost  of  that  part  of  the  supply 
which  is  created  at  the  greatest  advantage,  and  not 
the  cost  of  the  part  produced  at  the  greatest  di>.id- 
vantage,  as  an  old  formula  expressed  it.  It  is  the 
mill  that  makes  the  goods  mo.st  cheaply  which  is 
enlarging  its  product  and  bringing  the  price  down 
toward  its  level  of  cost;  as  soon  as  other  establish- 
ments get  possession  of  the  improvement  they  help 
forward  the  process,  and  as  they  get  still  better 
appliances  they  help  in  carrying  the  price  to  still 
newer  and  lower  standartls. 

The  Cause  of  the  Coincidence  of  Maximum  Cost  and 
Price.  —  At  any  one  moment,  it  is  true,  there  are  ill- 
located,  ill-equipped,  or  ill-managed  mills  that  are 
making  nothing  and  are  likely  soon  to  be  abandoned. 


I  J 


§■'' 


286 


F»8ENT1AL8  OP   ECONOMIC  THEORY 


They  are  the  marginal  mills  we  have  spoken  of,  and 

the  goods  thai  they  make  cost  all  that  purchasers 

will  give  for  them.     This  insures  a  coincidence  of 

the  price  of  the  goods  with  the  cost  of  making  them 

in  such  a  mill,  but  this  is  merely  an  incident  in  the 

process  of  eliminating  the  inefhcient  establishments 

from  the  field.    In  the  mill  which  happens  at  this 

date  to  Im;  the  one  al)out  to  be  crowded  out  the  cost 

of  the  goods  efjuals  the  selling  price  of  them  and  will 

exceed  it  as  soon  as  the  price  goes  to  a  lower  point. 

This  cost  hai)pens  transiently  to  coincide  with  the 

price,  but  does  not  regulate  it.     It  is  the  outlay  that 

the  best  mill  incurs  that  does  that,  since  it  sets  the 

standard  toward  which  the  price  is  made  to  tend.* 

'  Improvements  and  Prices  under  Competition 

The  figure  represents  a  subgroup  in  which  five  producers, 
a,  b,  c,  d,  und  e,  arc  operating.  Later,  a  new  establishment 
/,  IS  introduced.  The  upper  dark  line  represents  the  price 
of  a  unit  of  the  product,  and  the  lower  dark  line  the  cost  of 
making  a  unit  in  the  establishment  which  is  for  the  time  the 
most  efficient. 

The  dotted  lines  represent  the  respective  costs  of  produc- 
tion  in  the  different  mills,  ranging  from  a,  the  most  efficient 
to  e,  which  can  barely  hold  its  own.     What  the  figure  repre- 
sents  as  happening  is  as  follows:  — 

b  first  makes  an  improvement  which  lowers  his  cost  of 
production,  as  shown  by  the  descending  dotted  line  This 
enables  him  to  increase  his  output,  and  so  has  its  effect  on 
the  price,  which  descends.  Now,  producer  e  was  already 
selhng  goods  at  co.st,  but  he  is  not  at  once  driven  out  of  the 
bu-siness.  In.stcad,  even  though  he  cannot  earn  full  interest 
on  the  original  cost  of  his  fixed  establishment,  he  will  con- 
tinue to  run  a.s  long  as  he  can  make  his  plant  earn  anything 
at  all.  The  result  fs  a  virtual  reduction  of  the  capitalized 
value  of  the  plant  v.he  interest  on  which  is  an  item  of  cost). 
and  this  IS  what  is  represented  by  the  descent  of  the  dott^'d 
ime  which  represents  c's  cost  of  production.  The  situation 
IS  now  represented  by  the  series  of  points,  —6'    a'   &  etc 


LABOR    ANU   CENKRAL   PROGRESS 


287 


The  /.  iportance  of  Oelay  in  the  Closing  of  Marginal 
Establishments.  —  Now,  this  process  looks  as  if,  by  the 

representing  at  thtir  ^fc<)nd  stage  the  diffirmg  levels  of  cost 
in  the  case  of  diffiTfMit  pTiduccrs 

The  next  thiiig  that  liiij)!)*^!.^  is  an  improvement  made 
by  a,  causing  his  cost  of  production  to  fall  brlow  that  of  l>. 
The  resulting  fall  in  price  now  finally  drives  .■  out  of  l)iisihi~- 
he  can  no  longer  earn  anything  at  all  on  his  fixed  plant  U 
may  assume  that  producers  a,  b,  and  r,  nvIio  have  been  u\.\i.- 
ing  profits,  have  enlarged  their  productive  capacity  enouuli 
to  supply  the    market  fully  without  e's  contribution,    d   ia 


.11 


J  MlVtN  OUT  OF  luimiM 

-domvlH  OUT  OF  lUIINtH 


OF  FROOuCTION 


now  in  the  same  position  in  which  c  was  at  the  preceding 
stage,  —  earning  nothing  on  his  fixed  establishment  and 
barely  induced   to   remain   in   the  business. 

The  next  occurrence  represei'.ted  is  the  opicning  of  a  now, 
large,  and  very  efTicient  mill  by  /.  The  elTect  is  like  that  of 
improvements,  but  more  violent  The  fall  in  price  drives 
both  d  and  c  out  of  busine.ss.  6  is  nov.  on  the  margin ,  but 
saves  himself  from  loss  by  a  second  improvement,  which 
makes  him  asain  the  mo-t  efficient  jiroducer.  And  so  the 
■<roce.ss  goes  on  nd  injin'liiin. 

This  figure  illustrates  the  faet  that,  while  at  any  time  the 
prito  of  a  good  ronchly  equals  the  cost  of  it  to  the  least  effi- 
cient producers,  still  this  cost  does  not  govrm  the  price.  T  i 
ruling  factor  is  the  cost  in  the  most  efficient  mill,  tow;  1 
wliiih  the  price  tends;  and  all  that  the  cost  in  the  ie.'ist  etfi- 
cient  mill  determines  is  how  long  that  mill  .-hall  continue 
running. 


I 


288 


ESSENTIALS   OF    ECONOMIC    THEORY 


r«  f. 


- 1 
It- 1 


closing  of  mills  that  are  distanced  in  the  race  of  im- 
provemont,  labor  must   be  forced  out  of  the  sub- 
gmup.     So  it  would  be  if  the  reducing  of  the  price  t 
3ts  new  static  level  were  an  instantaneous  operation 
and  the  mfonor  mills  were,  in  the  same  instantaZs 
fashion,  compc-lled  to  close  their  doors.     These  how' 
ever    are  gradual  operations,  and   before  they  can 
possibly  pro,  uce  their  full  effects,  influences  will  have 
been  set  working  which  will  counteract  the  expelling 
tendency.     We  have  cited  as  such  an  influence    hf 
general  growth  of  society  in  numbers,  wealth,  and  con 
suming  power,  making  it  possible  for  a  group,  when 
an  economical  change  has  taken  place,  to  produce  anS 
so    more        ,s, ban  before  and  to  kee^  its  accus;:^' 
force  of  labor  in  order  to  do  so.     There  are  certain 
more  specific  influences  which  have  a  similar  effect  and 

in  fhJ^lii^^is,;^— ----  -- --^ '-' 

field  — mav  hold  .mnri    /  ^^  crowded  out  of  the 

some  caTe      In       tT  ''  "^'^^^-^^'-y  to  d.fine  terms  with 

soon  tHose  out  ^s'T.  ''"  T  '"'P^"^'^''  *'^°  '^  <l-«-d 
null  whic  toirna^s  I  7^"""  k  "''  ^''''''^P^'  ^"  -"liquated 
circulating  ca'u'nd    1      '^'    "*  '""''''^^  '^^  °""«^'-  *«  "«« 

acoTilfh  !         u        ^^   *''•'   '^f'^Preneur  should   reckon   as 
some  valuT  nr         7  ^^^  "**'  ''"^  ^^e  building  have 

»..,:  :i»  ^;- :rLr=r.-:  :-—--- 

.um  „.S,  H,      ,     .  '"^"""^  Kwxb  in  thl»  mi]|.    It  j,  . 
fZ  Ll,t  t  Si',  "'^'"•'  "'"*°'»  "  ">"«  "  I-'  "■'""' 


LABOR    AND    GENERAL    PROGRESS 


289 


render  it  as  unnecessary  as  it  is  useless  to  attempt  to 
resist  the  course  of  improvement, 

Cmtralizatinn  of  Bminess  an  Effect  of  Progress.  — 
From  the  facts  here  cited  it  ap{>ears  that  conserva- 
tism of  the  kind  tliat  resists  all  changes  condemns 
an  entrepreneur  to  destruction.     He  must  keep  in  a 
moving    procession    in    order    to    survive.    As    the 
essential  thing  which  is  changing  is  the  price-making 
cost  of  goods,  the  entrepreneur  must  see  to  it  that  in 
his  establishment  cost  declines.     While  this  does  not 
necessarily  mean  that  every  such  establishment  needs 
forever  to  grow  larger,  since  there  are  local  conditions 
in  which  relatively  small  shops  may  be  economical 
enough  to  survive,  yet  those  which  cater  to  the  general 
market  and  directly  encounter  the  competition  of  the 
great  producing  establishments  nmst,  as  a  general  rule, 
have  the  advantages  of  great  size  in  their  favor,  or 
sooner  or  later  be  crowded  out  of  the  field.    Many  of 
the  smaller  ones  fall  by  the  wayside,  and  the  business 
they  have  done  passes  to  their  already  large  rivals. 
Wherein  the  advantages  of  the  great  shop  lie  and  how 
one  that  is  of  less  than  a  maximum  size  may  survive 
in  spite  of  them,  are  points  for  later  consideration. 

Hoiv  Displaced  Labor  is  Replaced.  —  When  men  are 
actually  forced  to  leave  an  industry,  —  say  the  sub- 
group A',  —  they  fnul  themselves,  in  the  search  for 
employment,  in  the  same  position  as  a  body  of 
newly  arrived  immigrants  in  (|uest  of  work.  Men  of 
either  class  must  oft'er  thcmiselves  at  a  rate  that  will 
mduce  employers  to  take  them.  If  much  new  cap- 
ital has  lately  been  created,  it  is  naturally  possible  for 
the  men  to  get  employment  without  having  to  over- 
come serious  friction  or  to  reduce  their  demands  in  the 
way  of  pay.     In  the  absence  of  such  additions  to  the 


I' 


w. 


M 


3 

I 


290 


ESSENTIALS   OF   ECONOMIC   THEORY 


11 

11 
i| 


pi 

I 

ji 

i 


capital,  they  might  possibly  have  to  offer  some  in- 
ducement to  employers,  in  order  to  overcome  their 
reluctance  to  make  changes  in  their  shops.  We  shall 
see  in  due  time,  however,  that  where  improvements 
are  well  distributed  through  the  industrial  society 
and  have  their  natural  effect,  they  tend  to  increase 
the  general  demand  for  labor  at  the  original  rate  of 
pay. 

Effects  of  a  Series  of  Improvements  confined  to  One 
Industry  contrasted  with  those  of  Improvements  diffused 
through  the  Groups.  —  A  continuous  series  of  radical 
improvements,  all  originating  at  one  point,  would 
cc!id  of  themselves  to  cause  a  series  of  expulsions  < 
labor  from  that  point,  and  the  mere  increase  of  popu- 
lation and  wealth  might  not  so  fully  counteract  this 
tendency  as  to  prevent  a  positive  exodus  of  labor 
from  the  occupation  affected.  A  merely  relative  re- 
duction of  labor  in  this  occupation^  would  not  cause 
much  hardship,  since  it  would  only  mean  that  other  in- 
dustries were  attracting  the  greater  number  of  young 
laborers  entering  the  field  and  gradually  getting  a 
larger  and  larger  part  of  the  whole  working  popula- 
tion. If  men  actually  in  A'  can  stay  there,  no  one  is 
injured;  but  too  great  a  concentration  of  improve- 
ments at  this  point  might  drive  some  of  them  away. 
Such  concentration  is  the  opposite  of  the  general  rule. 
Improvements  do  not  confine  themselves  to  one  point 
or  to  a  few  points,  but  originate  at  very  many,  and 
this  fact  neutralizes  their  labor-expelling  tendency  and 
might  reduce  it  practically  to  nil.  If  labor  could  be 
made  more  efficient  in  every  group  of  the  whole  sys- 
tem, the  result  would  be  tv-  increase  the  quantity 
of  every  kind  of  goods.  Making  more  of  one's  own 
product  is  acquiring  power  to  buy  more  of  the  prod- 


LABOR  AND  GENERAL  PROGRESS 


^      i 


291 


ucts  of  others;   and  enlarging  the  general  output  of 
goods  tends  thus  to  increase  the  demand  for  all  kinds 
of  goods  as  w,>ll  as  the  supply.     If  you  make  cloth(>s 
an<l  I  provide  food,  and  we  exchange  products,  but 
do  not  satisfy  ,,u-h  other's  wants  to  the  point  of 
repletion,  it  is  w.'U  for  botli  of  us  that  you  should 
become  able  to  make  more  clot  lies  and  I  to  furnish 
more  food.     We  can  then  go  on  with  our  oi-iginal 
occupations  and  both  live  b(;tter.     In  this  there  is 
involved  no  displacement  of  labor  at  all;  and  neither 
would  there  need  to  be  any  disturbance  caused  by 
nmltiplying  in  well-adjusted  proportions  the  output 
of  each  group  and  subgroup  in  the  system  of  indus- 
try.    W  here  formerly  a  unit  of  A'"  was  exchanged 
for  one  of  B'"  or  C",  there  are  now  two  units  of  A'" 
given  for  two  of  either  13'"  or  C",  an.l  every  one  has 
more  things  to  consume  than  '     formerly  had.' 

Labor  attracted  toward    a    .-^.bgroup  as   a   Result 
of  Improvements  which  are   made   Elsewhere. —  The 

•  It  will  be  seen  that  the  maintenance  of  the  present  ex- 
rhango  ratios  between  A'",  B'",  C",  ete.,  when  costs  of  all 
of  them  are  reducing,  would  require  that   the>;e  costs  be  re- 
duced in  exactly  the  same  degree  in  each  ca.c,  and  that  the 
quantities  sold   at  the   new  cost   prices   .hould   be   increased 
m  unequal  d.-grees,  .       s  lo  bi;ng  the  different  prices  to  cost 
levels.     Ihc  demand  f,,-  one  article  is  more  elastic   than  is 
the  demand  lor  anoth.>r      A  slight  increase  in  the  supply  of 
-I       may  cause  a  large   r.'duetinn  of  the  selling  price    while 
it  may  require  a  gnat  ad<liti(jn  to  the  sujjply  of  B'"  to  pro- 
duce   this   effect .     There    must,    therefore,    be    some    changes 
in  the  relative  quantities  of  labor  in  the  different  subgroups 
even  though  there  has  been  an   equal  amount  of  "labor  sav- 
ing"  or  cost  reducing  in  all  of  them.     This  change  is  so  sl-ht 
a  amount  as  compared  with  what  would   be  eau.sed  by  im- 
provernLiits    coniin,-d    to    one    subgroup,    that    it    is    effected 
with   relatively  little  hardship  and  mainly  by  disposing  the 
constant  inflow  of  new  labor  at  the  points  where  it  is  needed 


1  ;; 


ft  I 


m 


292 


KSSENTIALS  OF   ECONOMIC  THEORY 


fact  that  the  demand  of  consumers  for  different  goods 
is  not  uniformly  elastic  has  to  be  taken  into  account. 
There  are  two  distinct  kinds  of  movements  in  the  group 
system,  brought  about  by  improvements  in  method. 
Each  improvement  in  and  of  itself  has,  as  a  rule,  a 
labor-expelling  effect,  but  this  effect  is  partly  neu- 
tralized by  general  growth  in  consumption  and  still 
more  by  improveinents  occurring  elsewhere.     Labor 
that  is  thrown  out  of  the  A  group  would  naturally  go 
to  group  B,  C,  etc.;    but  if,  as  we  have  just  seen, 
similar  influences  tend  to  expel  labor  from  the  B 
group  and  the  C  group,  the  labor  may,  for  the  most 
part,  stay  where  it  is,  with  the  result  that  mor(>  of  A'", 
B'",   and   C"    is    offered    to    consu-^'TS.     The    in- 
creased output  of  me  group  is  itself  a  means  of  re- 
taining labor  in  other  groups,  even  though,  thanks  to 
mere  methods,  that  involves  making  more  of  every 
other  kind  of  commodity. 

The  Supply  of  One  Kind  of  Goods  Equivalent  to  a 
Demand  for  Others.  —  There  should  be  no  difficulty 
in   interpreting,  in  this   connection,  the  traditional 
statement  that  "the  supply  of  one  kind  of  goods  con- 
stitutes a  demand  for  another."     An  increment  of 
A'"  and  one  of  B"'  coming  into  existence  together 
supply  wants  common  to  their  two  sets  of  producers 
and  both  groups  can  gain  by  exchanging  such  portions 
of  their  respective  products  as  they  do  not  retain  for 
their  own  use.     If  A'"  and  B'"  were  the  only  con- 
sumers' goods  used,  a  part  of  the  excess  of  each  would 
be  distributed  among  the  members  of  the  group  pro- 
ducing it,  and  the  remainder  would  be  given  in  ex- 
change for  some  of  the  other  kind  of  goods,  also  for 
distribution  among  the  members  of  the  hrst-named 
group.    This  is  what  actually  happens  when  a  mul- 


LABOR    AND   GENERAL    PROGRESS 


293 


I    f : 


titude  of  articles  for  consumption  are  produced  in 
increasing  quantities. 

Effect  of  an  Increase  of  Individual  Incomes  m  the 
Character  of  Goods  Consumed.  ~  Such  an  increase  of 
the  [)ro(luctive  power  of  a  group  means,  of  course,  an 
increase  of  individual  incomes,  and  it  causes  men,  as 
we  liave  seen,  to  consume  better  things  rather  than 
more  of  them.     There  is  a  c(>rtain  merely  quantitative 
enlargement  of  every  one's  consumption  of  goods 
of  a  given  kind,  every  one  using  more  of  A'"  than  he 
used  before;   but  the  greatest  change  shows  itself  in 
the  quality  of  what  he  uses.     Every  man  buys  and 
consumes  better  articles  of  the  A'"  kind,  as  well  as 
of  other  kinds.     His  food,  his  clothing,  etc.,  are  all 
prepared  in  a  more  elaborate  way,  and  he  has  more 
of  what  we  call  form  utility  which  results  from  the 
fashioning  of  things,  and  relatively  less  of  the  elemen- 
tary utility  which  inheres  in  the  raw  material.     There 
is  somewhat  more  of  raw  material  and  very  much 
more  form  utility  in  the  goods  he  demands  for  per- 
sonal consumption.    This  requires  that  labor  should 
move  upward  in  the  group  system,  and  that  more  of  it 
than  before  should  betake  itself  to  those  subgroups 
where  the  fashioning  of  the  raw  material  is  done  and 
where  the  finishing  touches  are  applied  to  goods. 
The  effect  of  the  constant  improvement  of  all  pro- 
*^-^^!.."/  P'^o^^^^^'o"'  therefore,  so  far  as  the  effect 
on  labor  is  concerned,  is  akin  to  the  effect  of  an  addi- 
tion to  capital,  in  that  it  moves  labor  upward  in  the 
subgroup  series.     It  puts  more  labor  into  mills  and 
shops  which  make  articles  of  comfort  and  luxury. 

The  Nnlnre  nf  the  Movements  actuaUy  caused  by 
Improvements.  —  This  upward  movement  cannot  go 
on  as  smoothly  and  with  as  little  disturbance  as  that 


I 


%^m 


294 


ESSENTIALS   OF   ECONOMIC  THEORY 


l!  I' 

fill 


Si 


m 


which  is  caused  by  the  increase  of  capital.    Whenever 
a  greater  gain  is  made  at  one  point  than  is  made  at 
another,  an  influence  is  set  working  which,  of  itself, 
tends  to  send  labor  from  the  one  point  to  the  other. 
The  slowness  with  which  the  change  of  method  pro- 
ceeds affords  the  time  that  is  necessary  for  the  pro- 
tection of  labor  in  the  first-named  group,  since  little 
movement  takes  place  before  the  effects  of  improve- 
ments made  in  the  second  group  begin  to  be  felt.    If 
in  1906  an  improvement  is  made  which,  in  the  course 
of  five  years,  would  cause  some  labor  to  move  from 
the  subgroup  A'"  to  the  subgroup  B'",  and  in  1907  a 
corresponding  improvement  is  made  in  the  latter 
industry,  the  equilibrium  is  restored  before  enough 
disturbance  has  taken  place  to  require  any  absolute 
reduction  of  labor  in  A"\    The  facts  are  (1)  that  new 
laborers  as  they  enter  the  field  are  drawn  more  to 
the  upper  subgroups  than  to  the  lower  ones,  —  to 
the  A'"  and  the  B'"  rather  than  to  the  A  and  the  B 
of  the  two  series,  —  and  that  in  moving  upward  they 
are  drawn  at  first  more  strongly  toward  B'"  and  later 
more  strongly  toward  A"\    This  is  the  nearly  constant 
fact  in  industry  and  is  the  grand  resultant  of  all  the 
forces  we  have  described  —  an  upward  flow  that  is 
continuous  but  does  not  follow  strictly  vertical  lines. 
As  young  men  —  the  sons  of  workers  in  A,  B,  C,  and 
D,  who  might  otherwise  have  remained  in  their  fathers' 
occupation — move  to  the  subgroups  that  stand  higher 
in  the  several  series,  they  first  go  in  larger  number 
toward  5"'  than  toward  ^"',  and  later  in  larger  number 
toward  A'".    There  is  a  wavy  movement  toward  the 
right  and  then  toward  the  left  in  the  steady  flow  of 
labor  from  th    groups  that  create  the  raw  material 
to  those  that  impart  to  those  materials  the  form  utili- 


LABOR    AND    GENERAL   PROGRESS 


295 


ties  which  they  need  to  fit  them  for  service.  An 
actual  lessening  of  the  number  of  workers  in  an  entire 
group  in  consequence  of  an  improvement  in  the 
method  of  production  is  practically  unknown,  and 
even  a  positive  lessening  of  the  number  in  a  sub- 
group is  exceedingly  rare. 

Apparent  Exceptions  to  the  Rule.  —  Exceptions  to 
this  rule  which  are  rather  apparent  than  real  will 
occur  to  every  one.  The  discovery  of  a  great  supply 
of  mineral  oil  put  an  end  to  the  use  of  whale  oil  for 
illuminating  purposes,  though  it  allowed  the  whale 
fishery  to  survive  on  a  reduced  scale  antl  produce  oil  for 
other  purposes,  in  so  far  as  the  rawest  material,  the 
whales  themselves,  were  not  exterminated.  The  ex- 
haustion of  a  supply  of  raw  material  was  here  a  domi- 
nant fact,  and  the  effects  it  produced  may  be  again 
expected  when  mineral  oil  shall,  in  turn,  become 
scarce.  Men  will  move  out  of  the  subgroup  produc- 
ing the  crude  oil,  as  nature  forces  them  to  do  so,  but 
their  movement  cannot  be  referred  merely  to  improve- 
ment in  the  mode  of  extracting  the  oil  or  transporting 
and  refining  it.  The  fact  which  illustrates  the  rule 
we  have  stated  is  that  whil(>  mineral  oil  drove  whale 
oil  out  of  the  field  as  an  illuminant,  this  did  not  re- 
duce the  number  of  men  in  the  general  group  which 
produces  illuminating  oil.  More  men  were  set  work- 
ing in  the  oil  fields  than  ceased  working  on  the  whal- 
ing ships.  A  new  raw  material  was  used  in  creating  a 
similar  finished  product,  and  as  the  general  industry 
wliich  made  this  product  grew  larger  rather  than 
smaller,  the  total  demand  for  labor  in  oil  production 
was  not  lessened.  Thi.=!  does  not  prove  that  old  sailors 
did  not  suffer  from  the  change.  Young  sailors  could 
go  to  the  oil  fields  or  elsewhere,  but  men  who  wore 


ft'-! 


296 


ESSENTIALS  OF  ECONOMIC  THKORY 


not  adaptable  could  not  do  so,  and  the  hardship  thus 
entailed  is  not  to  be  overlooked.  We  are,  however, 
forming  a  judgment  of  movements  which  pervade 
a  vast  industrial  system,  and  we  need  most  to  know 
what  is  their  grand  resultant.  If  that  were  a  gen- 
eral displacement  of  labor,  causing  increasing  idleness 
and  suffering,  the  system  that  involved  this  result 
would  stand  condemned.  The  general  resultant  is 
the  opposite  of  this. 

A  Drift  of  Labor  toward  Certain  General  Groups.  — 
We  have  just  noticed  that  movements  of  labor  in  the 
group  system,  caused  by  improvements  in  method, 
consist  mainiy  in  an  upward  flow  of  labor,  accom- 
panied by  irregular  lateral  movements,  the  labor 
drifting  to  the  right  <  tr  the  left  as  it  is  more  strongly 
attracted  now  to  one  point  and  now  to  another  on  the 
same  horizontal  plane.  The  general  mass  of  it 
swerves  now  to  the  right  and  now  to  the  left  in  its 
general  ascending  course,  though  none  may  be  ac- 
tually expelled.  This  description  of  the  drift  of 
labor  is  too  general  even  to  describe  all  the  perma- 
nent currents.  Some  entire  groups  produce  only  or 
chiefly  luxurious  goods,  and  to  those  there  is  the  same 
drift  of  labor  as  there  is  to  the  upper  subgroups  of 
the  general  series.  If  there  be  a  group  of  D's  making 
an  article  which  only  the  well  to-do  can  afford  to  use, 
it  will  swell  in  size  and  in  the  volume  of  its  output 
from  the  same  causes  —  improved  methods  and  gen- 
eral enrichment  — which  cause  A'",  B'",  and  C"  to 
outgrow  A,  B,  and  C. 

Displacements  of  Mature  Laho-  ?rs  naturally  tend- 
ing to  Diminish.  —  When  an  improvement  is  made 
in  one  of  the  upper  subgroups  while  the  general  flow 
of  labor  is  toward  these  groups,  the  effect  is  not  usually 


"^W£* 


LABOR    AND   GENERAL   PROGRESS 


297 


fr^ 


i     ; 


to  lessen  the  absolute  number  of  workers  in  the  upper 
subgroup  where  the  improvement  has  been  made, 
but  merely  to  prevent  it  from  gettinj?  a  pro  rata  share 
of  the  labor  that  is  moving  upward  toward  this  tier 
of  subgroups  from  the  lower  ones.  The  change  in 
the  apportionment  of  the  social  laboring  force  l>e- 
tween  the  upper  subgroups  and  the  lower  ones  is 
made  gradually,  without  violent  transfers  of  particular 
men  from  point  to  point,  and  merely  by  directing  to 
the  upper  subgroups  a  disproportionate  nuinbi^r  of 
young  workers  who  are  selecting  their  fields  of  em- 
ployment. In  general  labor  moves  from  point  to 
point  in  the  system  without  requiring  many  particular 
laborers  to  do  so.  As  actual  loss  of  places  by  persons 
of  mature  age  is  the  chief  evil  connected  with  changes 
in  methods  of  protluction,  it  is  a  most  welcome  fact 
that  the  influence  which  we  are  studying  tends  nat- 
urally to  reduce  the  extent  of  it. 

The  Discarding  of  Aged  Laborers  mainly  caufied  by 
a  Further  Influence.  —  Quite  apart  from  a  demand 
for  less  labor  at  a  particular  point  in  the  system,  there 
may  occur  a  discharging  of  men  merely  because  of  age 
and  a  substituting  of  younger  men.  In  establish- 
ments where  the  pace  is  a  rapid  one  men  have  thus 
to  give  place  to  young  successors  at  an  earlier  age 
than  the  one  at  which  men  give  place  in  other  em- 
ployments. The  effect  of  some  machinery  is  to  im- 
prove the  chances  of  old  men,  while  that  of  other 
machinery  is  to  i.  luce  them.  A  lightening  of  toil 
and  a  shortening  of  the  working  day  preserve  men's 
powers  and  enable  them  to  retain  employment  longer. 

The  Natural  Tendency  perverted  by  Monopoly.  — 
When  hardships  come  on  a  large  scale  in  consequence 
of  8  discharging  of  workers,  they  are  chiefly  due  to  an 


i 


\ 


298 


E88ENT1AL8   OF   ECONOMIC   THEORY 


M 


pi 

li 

ii 

I 


abnormal  influence  which  now  shows  itself  in  ugly 
and  disquieting  ways  throughout  the  industrial  sys- 
tem, that,  namely,  of  monopoly.     Reducing  forces  for 
the  sake  of  curtailing  production  and  raising  prices 
is  what  does  the  mischief.    This  influence  undoes  at 
many  points  the  beneficent  effects  of  free  competition 
and  causes  grave  hardships  to  particular  workers  while 
affording  no  compensating  gain  to  the  consuming 
public.     It  portends  evil  for  society  as  a  whole  as  well 
as  for  the  working  classes,  on  which  its  hand  may 
be  heavily  laid.     In  a  perfectly  natural  system,  in 
which  competition  would  do  all  that  pure  theory  at 
the  outset  of  this  study  has  assumed  that  it  will  do, 
the  evil  entailed  by  local  improvements  would  be 
relatively  small  and  the  diffused  benefits  enormous, 
t  In  proportion  as  the  movement  approaches  steadiness 
and  as  gains  are  made,  not  by  radical  changes,  now 
her.-,  now  there,  and  now  elsewhere,  with  long  in- 
tervals  between   them,   but   by  smaller  economies 
made  nearly  everywhere  and  in  very  quick  succession, 
the  cause  of  the  hardship  is  reduced.    There      less  of 
violent  expulsion  of  labor  from  its  fields  and  more  of 
a  gradual  drifting  of  labor  rather  than  particular 
laborers  from  the  subgroups  that  create  elementary 
products  to  those  which  fashion  them  into  fine  and 
costly  shapes.    There  is  small  hardship  in  the  natural 
selection  by  new  laborers  of  the  employments  where 
they  are  most  needed,  and  there  is  often  little  in  a 
transfer  of  a  person  who  has  tended  a  machine  of 
one  kind  to  a  machine  of  a  different  kind.     Instances 
there  still  are  of  manual  skill  brought  to  naught  by 
the  invention  of  a  mechanical  automaton  that  does 
the  work  more  rapidly  and  accurately  than  the  hand 
of  man  can  do  it;  and  the  worker  who  possesses  this 


LABOR   AND  GENERAL   PROGRESS 


299 


skill  must  usually,  in  such  cases,  content  himself  with 
an  employment  where  his  more  general  aptitudes 
may  stand  him  in  good  stead  and  insure  him  at  least 
an  average  rate  of  pay.  The  special  aptitude  which 
he  had  for  performing  one  operation  counts  for  noth- 
ing; and  this  happens  when  men  who  have  worked  in 
one  department  of  a  mill  have  to  accept  work  in  other 
departments  of  the  same  mill  or  in  other  employ- 
ments. 

A  Workman's  Specific  Loss  as  compared  with  his 
Share  of  a  Social  Gain.  —  The  test  question  in  cases 
like  these  is  whether  the  man  is  helped  or  harmed 
by  the  general  effect  of  improvements,  including  not 
only  the  one  which  has  caused  him  to  change  his 
occupation,  but  all  others  which  have  taken  place  since 
he  began  working.  To  this  question  there  can  be 
but  one  answer :  in  the  course  of  a  lifetime  the  balance 
is  in  favor  of  progress  even  in  the  caf^e  of  the  average 
victim  of  the  movement,  and  it  is  overwhelmingly  so  in 
the  case  of  others.  What  a  man  sacrifices  when  he 
is  transferred  from  one  machine  to  another  is  usually 
more  than  offset  in  a  term  of  years  by  what  he  gains 
in  consequence  of  the  general  increase  in  the  producing 
power  of  labor.  At  the  time  of  the  displacement  he 
suffers,  but  by  its  constant  increase  in  wealth  and 
productivity  society  more  than  atones  for  the  injury. 
The  goods  that  emerge  from  the  mills  are  multiplied ; 
the  share  falling  to  labor,  as  that  share  is  determined 
by  the  test  of  final  productivity,  grows  steadily 
larger;  and  the  men  who  have  never  served  a  long 
apprenticeship  at  anything,  but  have  learned  their 
present  trades  quickly  and  can  learn  new  ones  as 
quickly,  are  producing  and  getting  far  more  than 
they  could  possibly  get  under  a  regime  of  skilled 


300 


ESSENTIALS   OF    ECONOMIC   THEORY 


manual  labor  or  of  inferior  machinery,  and  far  more 
also  than  their  successors  will  get  hereafter  if,  by  any 
calamity,  mechanical  inventions  shall  cease  to  be 
introduced  and  other  product  multipliers  shall  be 
barred  from  the  field.  The  hoi)e  of  working  human- 
ity lies  mainly  in  the  contimiance  of  the  changes 
which  give  it  a  forever  enlarging  command  over 
nature.  Some  classes  might  live  comfortably  with- 
out this,  but  for  the  V  .vr  it  afTords  the  main  ground 
of  hope  for  increasing  comfort  and  a  coming  time  of 
general  abundance. 


^i.i.':>iiit>jk^!>:^^h 


CHAPTER  XVIII 

CAPITAL   A8    AFFECTED    BY    CHANGES    OF    METHOD 

Labor  Saving  and  Capital  Concentrating.  —  There 
is  a  common  impression  that  whatever  saves  labor 
usually  requires  an  increase  of  capital  in  the  industry 
where  the  economy  is  secured,  and  this  impression 
is  justified  by  the  experience  of  the  century  follow- 
ing the  invention  of  the  steam  engine  and  the  early 
textile    machinery.     Hand    spinning    and    weaving 
require  small  amounts  of   fixeil   capital,  while  the 
mills   in   which  spinning  and  weaving  are  done  by 
steam  or  water  power  re<iuire  a  great  deal.     For- 
tunately in  any  long  period  this  capital  comes  as 
abundantly  as  it  is  needed  from  the  profits  of  the 
very  business  that  calls  for  it  and  does  not  reduce 
the  capital  of  oLlior  industries.    The  profit  of  one 
year  furnishes  the  new  in'^truments  rcfjuired  in  the 
next;     but    the    immediate    effect    of    substituting 
a  costly  machine  for  hand  labor  is  to  concentrate 
capital,  or  to  call  it  from  places  to  which  it  would 
otherwise  go. 

The  Liberation  of  Capital  by  Invention.  —  For  a 
long  period  it  was  the  general  rule  that  a  mechanical 
invention  at  first  '-ailed  capital  to  the  point  at  which 
it  w".s  applied,  although  it  afterward  created  new 
capital  and  sent  it  away  to  make  more  than  good 
the  draft  it  originally  made.  Th:^  rule  is  no  longer 
universally  applicable.    When  an  in     :  tion  cheapens 

301 


i^l 


302 


ESSENTIALS   OF    ECONOMIC   THEORY 


I ; 


It  i 


>\ 


capital  goods,  it  liberates  capital.  It  is  clear  that 
a  hundred  and  twenty-five  years  ago  there  was 
small  chance  that  an  invention  would  liberate  very 
much  capital  by  reducing  the  cost  of  making  tools, 
buiklings,  rails,  machinery,  etc.,  since  there  were 
so  few  of  them  to  cheapen.  Now  that  machines 
are  at  hand  in  myriad  forms  the  chance  is  large  that 
an  invention  will  substitute  for  many  o'  them  others 
of  less  costly  construction.  It  will  in  these  cases 
cause  less  capital  to  be  required  per  machine  than 
was  formerly  needed. 

Simplifying  the  Farms  of  Machinery  and  Cheapen- 
ing the  Materials  of  lL~Tae  history  of  ii.vention 
shows    tnat    the    early    machines    sometimes    took 
cumbersome  ai<.d  expensive  fornis,  for  which  simple 
and   cheaper   forms   were   later  substituted.     Much 
simplifying  of  mechanical  appliances  is  all  the  while 
going  on,  and  this,  of  course,  liberates  some  capital 
Making   instruments   of   any   kind   out   of  cheaper 
materials    has   the   same   effect   that   anvthing   has 
which  reduces  the  cost  of  constructing  the  instru- 
ments.    Bessemer    steel    has    made    rails,    bridges 
ships,  buildings,  steam  boilers,  and  a  vast  number 
of  mechanical  tools  and  appliances  less  costly  than 
they  were,  and  so  has  liberated  some  of  the  capital 
which  such  things   formerly  embodied.     After  one 
of  the   machines   of  the   costlier  type   has   earned 
the  fund  on  which  its  owner  relies  for  replacing  it 
as  It  IS  worn  out,  it  appears  that  a  part  of  this  fund 
will  suffice  for  procuring  a  perfectly  good  substitute 
for  It,  and  the  remainder  may  be  used  for  procuring 
other  appliances  of  production. 

Chenppmn,  the  Prn.r..  .f  Making  Indrumenls.  ~ 
If  we  recur  to  the  tab'     /hich  represents  the  groups 


CAPITAL    AND    CHANGES   OF   METHOD 


303 


A'" 

B'" 

C" 

H'" 

A" 

B" 

C" 

H" 

A' 

& 

C 

H' 

A 

B 

C 

H 

oi  the  industrial  system,  we  shall  see  tliat  improve- 
ment.-:   0.    method    in    the    general   group    H-H'" 
ha\e  tljj  effect  of  liberating  capital   in  the  other 
gr'.UDS    f...d   subgroups.     //'"  is  the  comprehensive 
symbol   that    represents   active   instruments   of   all 
kinds.     It  is  engines  and  boilers,  looms  and  spindles, 
lathes    and    planers,    rails,    cars,    bridges,    tunnels, 
canals,  ships,  buildings,  and  all  the  myriad  instru- 
ments which  actively  aid  man  in  making  the  things 
he  wants  for  consumption.     New  methods  at  H-H'" 
make  the  supply  of  all  these  things  cheaper,  which 
means  that  the  labor  and  capital  of  the  group  H  H'" 
which  would  have  been  reciuired  for  replacing  the 
instruments  used  in  the  other  groups  will  more  than 
suffice  for  that  purpose,  and  a  part  of  their  time 
may  be  given  to  making  machinery,  etc.,  not  for- 
merly used.     This  amounts  to  liberating  a  part  of 
the  fixed  capital  in  the  three  groups  producing  A'", 
B'",  and  C" ,  although  ihe  free  capital  that  is  thus 
gained  may  in  part  be  used  in  furnishing  additional 
appliances  for  use   in  these   same  groups 

Local  Concentration  of  Capital  which  causes  a 
General  Liberation  of  It.  —  In  such  a  case  the  new 
method  used  at  H'"  may,  at  its  introduction,  re- 
quire more  capital  than  was  formerly  used  at  that 
point  in  the  system.  Building  Bes.semer  converters 
was  a  costly  operation,  though  the  output  of  cheap 
steel  afterward  saved  far  more  capital  than  the 
cunvcrtcrs  rccfuired.  The  power  canals  of  Niagani 
cost  something,  but  the  products  created  by  means 


-J-  ,1  y. 


304 


ESSENTIALS   OF   ECONOMIC   THEORY 


of  them  are  cheapening  many  tools  of  industry; 
and  Hke  effects  follow  most  applications  of  electric- 
ity for  utilizing  waterfalls  and  carrying  to  great 
distances  the  power  which  they  generate.  They 
follow  on  a  considerable  scale  as  the  culm  of  coal 
mines  is  economically  burned  and  iiade  to  generate 
steam  and  drive  dynamos.  AU  cheapening  of  trans- 
portation, besides  making  cons-miers'  goods  cheaper, 
has  the  same  effect  on  producers'  goods,  and  by 
this  means  liberates  capital.  It  causes  a  single 
productive  appliance  to  cost  less  than  it  otherwise 
would  cost  and  renders  available  for  other  purposes 
a  part  of  the  outlay  that  was  formerly  required  for 
replacing  it  at  the  end  of  its  industrial  career. 

Effect  of  Speeding  Machinery.  ~  Increasing  the 
speed  of  a  maehiiie  is  a  capital-liberating  opera- 
tion, since  it  enables  a  certain  number  of  machines 
to  do  the  work  of  a  larger  number.  I^uning  spindles 
and  looms  rapidly,  while  it  requires  fewer  laborers 
for  a  given  amount  of  product,  requires  fewer  spindles 
and  looms  also. 

Coi-es  in  which  Liberated  Capital  remains  partly 
in  the  Same  Industry  in  which  it  has  been  Used.  — 
A  distinction  has  carefully  to  be  made  between 
causing  less  capital  to  be  used  per  unit  of  {)hysieal 
product,  and  causing  loss  to  be  used  in  a  particular 
occupation  without  regard  to  the  amount  of  the 
product.  If  we  cheapen  the  operation  of  cloth 
making,  we  shall  increase  the  consumption  of  cloth, 
and  m  this  way  we  may  draw  new  capital  into  this 
business,  even  though  we  can  build  and  equip  a  mill 
of  a  given  capacity  more  cheaply  than  before.  In 
this  case  we  have  liberated  capital  in  this  business 
and  at  once  reem])loyed  it  at  the  same  point.     If 


CAPITAL   AND   CHANGES   OF   METHOD 


305 


\      ! 


we  use  as  many  looms  as  before,  the  more  rapid 
running  calls  for  more  spindles  to  furnish  yarn,  and 
the  new  spindles  recjuire  larger  engines  antl  boilers, 
or  more  water  wheels,  wheel  pits,  and  reservoirs,  to 
furnish  power.  Enlarging  a  business  '  this  way , 
usually  calls  for  an  enlarged  general  capital  in  the  ' 
industry,  though  it  calls  for  less  capital  for  a  given 
output;  and  the  striking  fact  is  that  this  effect  may 
be  realized  by  means  of  devices  which  actually  save 
capital  at  particular  points  in  the  industry.  If, 
after  power  looms  were  introduced,  some  inventive 
genius  had  matle  them  cost  only  a  (quarter  as  much 
as  on  their  first  introduction  they  had  cost,  the 
profits  of  the  business  would  have  been  increased 
and,  in  time,  far  more  capital  in  the  si.ape  of  spin- 
ning machinery,  engines,  etc.,  v.-ould  have  been 
re(iuired  than  had  fo"nierly  been  used  in  those 
forms.  With  general  growth  of  population  and 
wealth  the  increased  consumption  of  cloth  calls, 
in  the  end,  for  more  capital  in  +be  form  of  the  looms 
themselves. 

General  Consumption  as  affected  hy  a  Specific 
Increase  of  Productive  Pt'er.  —  Consumption  in 
the  generic  —  the  use  of  consumers'  goods  of  every 
kind  —  grows  as  the  power  to  make  the  good  in- 
creases; but  a  point  that  is  of  great  importance  is 
that  any  specific  increase  of  productive  power  brings 
about  a  general  increase  of  consumption.  It  brings 
about  a  greater  all-round  creating  and  using  of 
commodity.  If  we  can  hereafter  make  the  A'" 
of  our  table  with  the  expenditure  of  half  as  much 
labor  and  capital  as  we  have  heretofore  used  in 
creating  it,  the  liberated  agents  of  production  be- 
come available  for  making  whatever  is  most  needed, 


%' 


306 


ESSEN-riALS   OF   ECONOMIC  THEORY 


and  they  will,  in  fact,  h        ,,i  for  increasing  the 
supply  of  all   three   type.  ,.,.nsi,n,ers'  goods  ren- 

Tr'tl'"  ?'  ''^'^'-      '''"''  "'"    ^''^"  "-^  "'"■•^'  of 
r      ,      '  ":!';   ^'  "  '"  'l"^"^'ti' '-^  ^''Ju«ted  hy  the  laws 
of  value.     Ihe  outcome  of  this  i.s  that  an  economy 
in  making  A'"  actually  giv<>s  us  more  of  A'",  B"' 
and  C".     A\'e   become  larger  consumers  of  every-  ' 
thing  because  of  the  cheapening  of  anything  which 
enters  into  our  list  of  articles  for  personal  use     This 
presents  a  furtlu.-  aspect  of  the  process  of  moving 
abor  and   capital   from  group  to  group,   in   which 
the   possibility   of   hardship   for   particular   persons 
.nheres.     The  conclusion  to  which  a  fair  weigliing 
of  the  effects  of  mechanical  progress  has  already  led 
us  is  that  there  are  very  few,  even  of  the  workers 
who  suffer  displacements  of  this  kind,  who  do  not 
during   their   lives   gain    far   more   than   they   lose 
by  general  progress;   and  the  effects  of  cheapening 
capital  goods  at  one  point,  and  so  liberating  capital 

^'  f'^nf.^  °*'''^''  ^'"'"*''  increases  this  beneficent 
effect.  The  special  costs  of  making  the  new  kinds 
of  machinery  have  been  large  in  the  earlier  stages 
ot  tiie  process,  but  have  afterward  grown  smaller- 
and  as  machinery  has  come  into  general  use  the 
liberating  of  capital  by  the  cheapening  of  the  ma- 
chines has  become  a  more  and  more  important 
factor.  Some  of  the  capital  hberatcd  at  .4  goes  to 
Tu'"  ^""^T  '"  furnishing  the  additional  amount 
ot  B     and  C"  which  enlarged  consumption  requires 

Hardships  mtailed  on  Capitalists  by  Progress  ~ 
As  the  old  handicrafts  have  now  been  largely  sup- 
planted by  machinery,  and  the  hardship  that  con- 
tinuing progress  entails  on  laborers  is  greatly  re- 
duced, there  is  involved  in  progress  a  new  burden 


Hv?'-T  ■ 


■^  m^'  ^  ^::m-'::^^-:?^:^^^cMM^ 


CAPITAL    AND    CHANGES   OF    METHOD 


307 


which  falls  altogether  on  the  capitalist  employer. 
The   machine   itself   is   often  a   hopeless   specialist. 
It  can  do  one  minute  thing  and  that  only,  and  when 
a  new  and  better  device  appears  for  doing  that  one 
thing,  the  machine  has  to  go,  and  not  to  some  new 
employment,  but  to  the  junk  heap.    There  is  thus 
taking  place  a  considerable  waste  of  capital  in  con- 
sequence   of  mecha.iical  and   other    progress.     As 
there   have    come    into    use   marine    boilers    made 
of  steel  and  capable  of  standing  a  very  high  pres- 
sure, the  low-pressure  boilers  of  former  days  have 
become  useless.     With  the  advent  of  triple  expan- 
sion  cylinders,  twin  screws,  and   better  and  larger 
hulls,  ships  of  the  old  type  lost  their  value;    and 
similar  things  are  occurring  in  every  line  of  pro- 
duction.   A  new  mill   is  built  and  equipped  with 
the  best  machinery  known  at  the  date  of  its  build- 
ing ;  but  before  a  year  has  gone  by  all  the  machines 
in   one   department   are   so   antiquated    that   it   is 
best  to  throw  them  out.      Indeed,  a  quick  throwing 
away  of  instruments  which  have  barely  begun  to 
do  their  work  is  often  a  secret  of  the  success  of  an 
enterprising  manager;    but  it  entails  a  destruction 
of  capital.     What  is  easily  to  be  seen  is  (1)  that 
a  single  change  of  that  kind  makes  an  immediate 
draft  on  the  general  fun*'  of  available  social  capital ; 
and  (2)  that  this  draft,  as  a  rule,  is  soon  repaid 
with    increase.     Machinery   that    is    nearly    new    is 
thrown  away  when   it   appears  that  another  kind 
soon  will  earn  enougli  to  make  good  the  waste  thus 
entailed,  and  the  paradox  is  in  the  fact  that  the 
entrepreneur    who    quickly    destroys    capital    really 
saves  it,  while  he  who,  by  using  the  old  pppliances, 
tries  to  holil  on  to  the  capital  loses  it,  since  he  sac- 


t      i     ! 


m 


■ :  "••'^Ry'.-  rwi 


308 


ESSENTIALS    OF   ECONOMIC   THEORY 


nfices  profits   from   which  more  would  have   come 
Runmng  h.s  antiquated  engine,  the  unenterprising 
man  has  to  content  hin,.self  with  sn.all  n>turns  and 
in  the  meanwiUle,  sees  his  actual  productive  fund' 
'  Z    rfJ"^  '^  deterioration  of  the  old  equipment. 

Method.  -  What  has  happened  in  such  a  case  to 
the  enterprising  man  is  a  loss  of  personal  capital. 
-What  he  has  just  paid  for  the  supplanted  instru- 
ments has  gone  for  nothing.     His  financial  status 
IS   improved   rather   than   injured    because   of   the 
prospective  profits  which  the  new  appliances   will 
.earn.    What  has  happened  to  the  man  who  keeps 
the  old  machinery  is  a  partial  or  total  loss  of  what- 
ever he  has  lately  put  into  it,  not  offset  by  such 
profi  s.     By  keeping    his  capital   goods    he  i   los- 
mg  his  capital  without    having   his  rival's  assured 
prospect  of  regaining  it.     Whether  the  gains  made 
by  those  who  promptly  discard  antiquated  appli- 
ances offset  the  wastes  suffered  by  those  who  hold 
on  to  them  too  long,  is  a  question  that  requires  more 
space  than  can  here  be  allotted  to  it;  but  the  follow- 
ing facts  determine  the  answer:  — 

(1)  Instruments  naturally  at  any  one  date  are 

durtLT''^'  ^^'  ''^"^^  *""  ^^°"*  ^^^^  *^'^'  ^'°^^'"g 

(2)  Discarding  all  of  one  kind  at  any  one  date 

would  involve  drawing  on  the  fund  of  sociaTcaphl 

or  about  one  half  of  the  amount  needed  to  repC 
these  instruments.  't^piate 

(3)  Very  few  are  .t  once  discarded  on  the  inven- 
tion of  the  improved  types. 

orl'l!  fT'"!!  ^'"',^  '^"  '"  '^'  P"««  «f  the  product 
created  by  the  aid  of  these  old  machine,  can  pre- 


CAPITAL   AND   CHANGES    OF   METHOD 


309 


vent  them  from  earning  the  remainder  of  the  fund 
required  for  replacing  them.  If  they  do  this,  they 
prevent  any  positive  destruction  of  capital  which 
many  inventions  cause. 

(5)  When  only  one  entrepreneur  introduces  the  new 
appliance,  his  production  is  usually  increased,  but 
not  to  an  extent  that  causes  a  quick  fall  in  price. 
This  affords  to  the  users  of  old  appliances  whose 
plants  are  not  already  at  the  final  point  of  ineffi- 
ciency a  chance  to  continue  accumulating  the  fund 
for  replacement.  The  profits  of  the  user  of  the 
better  appliance  are  meanwhile  accruing. 

(6)  When  all  entrepreneurs  introduce  the  new 
appliance  at  once  they  do  so  —  provided  that  their 
act  is  intelligent  —  because  the  saving  effected  in 
the  cost  of  production  makes  the  change  advan- 
tageous in  spite  of  the  waste  entailed.  They  expect 
an  all-round  net  profit  during  the  period  before 
the  price  of  the  product  falls  to  its  new  level,  and 
they  expect  that  this  will  give  them  more  than  is 
required  for  interest,  cost  of  future  replacement  of 
the  superior  instruments,  and  the  deficit  in  the  ac- 
counts caused  by  the  early  discarding  of  the  super- 
seded app'i\nces. 

(7)  Without  treating  this  prospective  profit  in- 
hering in  the  new  appliance  as  capital,  we  must 
regard  it  as  affording  an  assurance  that  new  capital 
will  soon  appear.  There  are  great  gains  to  be  made 
by  using  the  new  appliances,  and  some  of  these  will 
add  themselves  to  the  permanent  fund  of  productive 
wealth. 

(8)  The  cost  of  the  now  appliances  may  be  de- 
frayed by  their  owner's  earlier  accumulations  or 
by  loans.     In  either  case  they  come  out  of  a  social 


^f* 


•«■■ 


_B"' 
-B" 
-B' 
-B 


310  KS8ENTIALS    OF   ECONOMIC   THEORY 

fund  that  is  created  mainly  by  the  api)liances  which 
m  a  preceding  period  have  yielded  special  gains 
The  machine  of  to-day  is  paid  for  from  the  available 
surplus  created  by  the  machine  of  an  earlier  day, 
and  a  series  of  inventions  enlarges  the  social  fund' 
of  capital  in  spite  of  all  wastes  by  which  it  is  attended. 
The  effect  that  a  series  of  improvements  has  on 
the  amount  of  social  capital,  if  we  measure  the  fund 
solely  on  the  basis  of  the  cost  of  the  capital  goods 
which    embody    it,    may    be    represented    thus:- 

The   horizontal    line 

A"     ^ — B'"     measures    time    and 

is  graduated  in  years 
from  one  to  ten.   The 
distance  of  the  point 
above  this  liase  rep- 
resents   the    amount    of    capital    as    estimated    in 
units  of  cost,  in  the   possession  of   the  society  at 
the   time  a  particular  improvement  is  made,   and 
would    remain    unchanged    if    society    were   static 
The  level  of  the  line  AB  represents  what,  under 
such  a  condition,  would   be  the  capital  of  a  dec- 
ade.    The    curved    line    AB',    dipping    below    AB 
and  then   rising  above  it,  express(>s  the  fact  that 
a  single   important   improvement   first  trenches  on 
the  amount  of  capital  in  use,  and  soon  mak(>s  good 
the  deduction  and  makes  a  positive  addition      It 
raises  the  snm  total  of  capital  to  the  level  of  the 
latter  part  of  the  line  AB\     The  curved  line  A'B'^ 
first   falling  below  A'B'  and  then   rising  above  it' 
expresses    the    fact    that    a    stcond    improvement' 
made  a  year  or  two  after  the  first  nnp,  makes  a  re- 
duction of  the  amount  of  capital  as  determined  bv 
the  first  improvement,  and  later  adds  more  than 


CAPITAL   AND    CHANGES    OF    MI.THOD 


311 


enough    to    make    good    this    reduction.     A    third 
improvement,  r.t   the  end   of  two  or  tliree   further 
years,  has  the  effect  expressed  by  the  line  A" H'" ; 
that  is,  it  first  reduces  the  fund  below  the  level  at 
which  at  that  time  it  would  otherwise  have  stood, 
—  but  by  no  means  to  tlie  level  at  which  it  stood 
when    the    series    of    improvements    began, —  and 
later  carries  it  above  the  line  expressing  the  highest 
level    it    would,    without    this    improvement,    have 
attained.     In   so   far  as   these   three   improvements 
affect  the  level  of  the  social  capital  for  the  ten-year 
periotl,  it  stands  at  the  level  indicated  by  the  line 
AA'A"B"',  and  no  later  improvement,  even  at  the 
time   of  its   introduction,   does  more  than  to  make 
fe   small   reduction   of  the   increment  of  capital   ac- 
cruing  from   the   products   of   the   earlier   improve- 
ments.    A   series   of   economical   changes   means   a 
perpetual  increase  of  the  social  capital  as  well  as 
a  perpetual  imjirovement  in  the  mode  of  applying 
labor.     The  increments  of  capital  due  to  the  earlier 
changes  are  far  more  than  is  retiuired  by  the  intro- 
duction of  any  later  one. 

The  Impossibility  of  Reducing  Capital  by  too  Rapid 
Progress.  —  There  is  a  theoretical  c[uestion  whether 
this  series  might  be  too  rapid  to  permit  this  result. 
If  the  interval  were  a  month  instead  of  several  years, 
and  if  the  amount  of  capital  put  into  the  new  ap- 
pliances were  the  same  that,  in  the  figure,  they  are 
represented  a^  requiring,  the  effect  would  be  to  make 
twelve  deductions  from  the  amount  of  the  social 
cipital  in  the  course  of  a  year,  which  would  carry 
it  some  distance  helnw  its  original  level,  while  in 
this  one  tjear  there  would  have  been  no  time  for  the 
profits  to  accrue  in  order  to  restore  and  add  to  the 


312  K88ENTIALS   OF   ECONOMIC   THEORY 

fund.  In  tho  next  year  and  the  following  ones 
this  would  follow,  and  the  effect,  in  the  course  of  ten 
years,  would  be  to  carry  the  social  capital  to  a  still 
higher  level  than  the  one  it  reaches  in  consequence 
of  the  slower  succession  of  economical  changes 
Increasing  the  rapidity  of  productive  inventions 
only  m-iltiplies  the  additions  made  to  the  soci' 
capital. 

We  may  summarize  the  chief  facts  concerning 
technical  progress  as  follows :  — 
:  (1)  Progress  may  throw  particular  men  out  of 
their  present  employment,  but  cannot  destroy  the 
social  demand  for  their  labor.  Somewhere  in  society 
there  is  a  place  for  them. 

(2)  If  improvements  were  long  confined  to  one 
subgroup,  they  might  send  labor  into  other  sub- 
groups and   even   into   other  general   groups     Oc- 

•urring  as  they  do  at  nearly  all  parts  of  the  system 
they  very  seldom  require  an  absolute  diminution  of 
the  amount  of  labor  in  a  subgroup,  and  practically 
never  cause  such  a  reduction  in  a  general  group. 

(3)  The  gradual  introduction  of  an  improve- 
ment is  important,  since  it  affords  time  for  an  in- 
crease in  the  social  demand  for  the  product  which 
IS  thus  cheapened  and  for  introducing  at  many  other 
points  improvements  which  neutralize,  in  a  large 
degree,  the  labor-expelling  effect  of  the  first  im- 
provement. 

(4)  Technical  gains  are  the  largest  source  of  ad- 
ditions to  the  total  amount  of  the  social  capital. 
The  constant  influx  of  new  capital  facilitates  the 
placing  of  laborers  at  the  points  where  they  are 
needed.  "^ 

(5)  The  fact  that  elementary  utilities  which  are 


'^: 


i/v 


."»-**- -'--«^^>-: 


CAPITAL   AND   CHANGES   OF    METHOD 


313 


produced  by  agriculture  cater  to  a  less  elastic  demand 
than  do  the  form  utilities  which  are  thvj  product  of 
manufacturing  occupations,  has  caused  labor  to 
move  slowly  from  the  lowest  subgroups  of  the 
various  series  to  the  upper  ones,  as  the  productive 
power  of  labor  in  agriculture  has  increased. 

(0)  This  movement  is  so  gradual  that  it  can  be 
accomplished  almost  entirely  by  devoting  to  the 
industries  constituting  the  upper  subgroups  an 
enlarged  share  of  new  laborers  as  they  enter  the 
field  in  quest  of  employment.  Young  men  drift 
from  the  farm  to  the  village  and  the  city. 

(7)  In  addition  to  the  upward  flow  of  labor  in 
the  series  of  subgroups  there  are  some  lateral  move- 
ments, or  transfers  from  group  to  group,  to  be 
taken  into  account.  The  fact  that  improvements  are 
widely  diffused  and  that  there  is  a  succes.sion  of 
them  at  each  point  makes  it  possible  to  make  these 
lateral  movements  of  labor  in  the  same  way  in 
which  the  movement  within  the  groups  is  accom- 
plished; namely,  by  putting  the  new  men  who  are 
entering  the  field  of  employment  in  the  places  where 
they  are  most  needed. 

(8)  These  facts  do  not  always  prevent  particular 
men  from  losing  the  special  benefit  that  skilled  handi- 
crafts have  insured  to  them,  since  a  machine,  to  the 
running  of  which  they  are  compelled  to  betake  them- 
selves, may  often  be  as  well  tended  by  persons  who 
have  never  learned  such  a  handicraft. 

(9)  The  loss  thus  entailed  on  craftsmen  was  very 
large  during  the  original  process  of  supplanting  hand 
labor  by  machinery,  but  bids  fair  to  be  relatively 
small  hereafter,  since  fewer  men  go  through  long  and 
costly  apprenticeships,  and  since  the  operator  of  one 


I 


4'-  '¥  }-■ 


iA^^V 


314 


ESSENTIALS    OF    ECONOMIC   THEORY 


machine  can  usually  learn  to  operate  another  with 
little  waste  of  time. 

(10)  Such  injuries  as  particular  men  now  suffer 
from  the  introduction  of  economical  devices  are,  as 
a  rule,  more  than  atoned  for  even  to  these  men  'ly  the 
greater  j)r()(lu('tivity  of  social  labor,  as  it  is  applierl  in 
new  ways,  and  by  the  greater  abundance  of  social 
capital.  These  gains  ari'  the  result  of  improvements 
ni.'ule  in  the  earlier  periods, and  they  benelit  everyone 
who  la  burs. 

(11)  The  new  capital  created  by  productive  inven 
tioiis  is  an  essential  cause  of  the  continuing  gain  of  the 
working  class. 

(12)  While  most  inventions  at  first  draw  capita! 
from  the  social  fund  to  the  point  where  they  are  ap- 
plied, many  of  them  soon  liberate  capital  by  chcHpen- 
ing  particular  ap[)liances  of  f)ro(Iuction.  and  nearly 
all  of  th(>m,  by  means  of  the  profits  th(«y  insure,  ul- 
timr^ely  add  to  the  social  capital. 

The  Vital  Importance  of  Continued  Imjrrov^ent.  — 
Intelligent  study  will  make  it  clear  to  every  onf  that 
any  assertion  that  machinery  is  the  en(>my  nl  labor  is 
not  merely  erroneous,  it  is  a  contradiction  of  the  most 
striking  and  important  fact  cotin('ct(>d  with  sencral 
progress.     The  gains  of  labor  durin<r  the  pasr  "cnTury 
which  have  been  partly  due         th(    occur^.t.itsr   of 
areas  of  new  land,  have  been  ln!-ch   due  t(.    h-     tk 
chanical  inventions  and  tefhnival    :!scovpr"-   ^vT.-e> 
have  put  the  forces  of  nature  so  inrrr^lv  at   rn.n  -     "^ 
posal.     These  forces  have  work       for  ai'  vn-n^^x    n  - 
deed,  but  they  have  worked  lRrr:"v  \~r  -ne  TB»n  ^-rr 
labor,  whether  in  the  f:icf>iry,   ::    th=  ^-tt:     oi    — ^^ 

railroad,  or  on  the  farm.    Their    nef"--  ;i-n    sj-r«°^ 

sive,  since  they  signify  an  increat-^  ir  the  T-nciurav^ 


^w 


CAPITAL    AND    CHANG KS    OF    MKTHOD 


3i; 


power  of  that  hnal  unit  of  social  labor  on  which 
wages  generally  depend.  General  riches  have  been 
and  must  continue  to  be  generally  beneficent.  As  an 
isolated  man  working,  Crusoe-like,  for  himself  alone, 
gains  by  every  technical  discovery  he  can  make  and 
by  everything  he  can  add  to  his  stock  of  productive 
appliances,  so  society,  the  great  and  isolated  organ- 
ism which  is  the  tenant  of  our  plaiu't.  reaps  a  benefit 
by  every  improvement  it  can  make,  and  the  forces 
of  distribution  see  to  it  that  this  benefit  is  carried 
through  and  through  the  system  and  made  to  improve 
the  condition  of  the  most  humble  inemt)ers.  Since 
the  great  areas  of  new  land  are  no  longer  uvailabh^ 
as  a  future  resource,  the  hnpo  (jf  labor  during  the 
coming  centuries,  under  any  form  of  industrial  or- 
ganization, whether  it  be  comjjetitive  or  socialistic, 
rests  on  the  prospect  of  continued  technical  gains,  - 
an  unending  succession  of  calls  on  the  exhaustless 
serving  power  of  nature. 

The  Effect  of  Changes  in  the  Relative  Amounts  <>/ 
Labor  and  Capital.  —  The  law  of  wages,  as  stated  in 
an  early  chapter  of  this  work,  makes  it  evident  that 
an  increase  of  population,  while  the  social  fund  of 
capital  remains  the  same,  would  reduce  the  product 
of  marginal  labor  and  therefore  the  rate  of  wages. 
In  every  establishment  into  which  more  workmen 
should  come,  while  its  capital  remained  the  .same  in 
amount,  the  power  of  an  individual  worker  to  pro- 
duce goods  would  be  lessened.  Moreover,  any  influx 
of  laborers  into  the  society  as  a  whole  would  be  at- 
tended by  a  diffusion  of  them  among  all  the  groups 
and  subgroups,  so  that  the  power  of  an  indivi(hiai 
laborer  to  create  any  kind  of  goods  would  be  re- 
duced.   This  means  that  labor  has  lost  some  of  its 


■1' 


J,     i  *  4 


316 


ESSENTIALS  OF  ECX3N0MIC  THEORY 


power  to  create  commodity,  which  is  the  concrete 
name  for  general  wealth,  and  its  wages  fall  accord- 
ingly. 

An  influx  of  capital  without  any  change  in  the 
number  of  laborers  would  have  the  opposite  effect. 
It  would  add  to  the  productive  power  of  marginal 
labor.     As   the    new    capital    should    diffuse    itself 
through  the  producing  organism  it  would  enlarge  the 
product  of  workers  everywhere.    The  wages  of  labor 
depend  in  part  on  a  numerical  ratio  between  units 
of  capital  and  units  of  labor,  as  they  cooperate  in 
production;   and    the   change   in    the    ratio   which 
enlarging  capital  causes   improves  the  condition  of 
the  working  people.    The  capital  also  diffuses  itself 
throughout    the    system,    every   subgroup    gets    a 
share  of  it,  and  labor  everywhere  responds  to  this 
influence   and   produces   more   than    before.    In   a 
change  in  this  ratio  —  in  a  gain  of  per  cajrila  wealth 
in  productive  forms  —  lies  one  influence  which  has  a 
great  power  over  human  destiny  and  is  one  main 
cause  of  weal  or  woe  for  coming  generations.    Method 
as  it  improves  is  related  in  two  ways  to  this  critical 
change  in  the  ratio  of  capital  to  population.     It  is  a 
prominent  cause  of  the  increase  of  capital.    What 
men  make  by  juggling  with  values  and  putting  taxes 
on  other  men  adds  nothing  to  the  aggregate  wealth : 
but  what  they  make  by  improveiJ  methods  of  oro- 
duction  causes  a  net  addition  to  it.    The  improve- 
ment in  method  also  directly  reenforces  the  influenc  o 
of  enlarging  capital,  by  infusing  productivity  into 
labor  and  increasing  itb  returns. 

The  Resultant  of  the  hive  Dynaw'r  Changes  acting 
Together.  —  So  long  as  the  increase  of  capital  more 
than  offsets  the  increase  of  population,  the  ultimate 


m^m^:i2mm^ 


CAPITAL   AND   CHANGES   OF   METHOD 


317 


1 1  f;;! 


result  of  all  five  of  the  general  changes  which  charac- 
terize a  dynamic  state  is  to  increase  the  well-being  of 
laborers.  The  movement  of  labor  from  point  to  point 
in  the  system  of  industrial  groups  is  a  necessary  means 
of  securing  the  largest  gain  for  society  as  a  whole  and 
of  diffusing  the  benefit  among  all  members.  It  is 
wage  earners  who  are  most  numerous  and  most  needy, 
and  the  greatest  benefit  which  can  be  crediteil  to  any 
economic  influence  is  that  which  takes  the  shape  of  a 
rise  in  wages.  Moreover,  an  upward  trend  in  the  rate 
of  pay  is  of  far  greater  importance  than  the  level  of 
the  rate  at  any  one  time.  A  system  that  shoukl  af- 
ford high  present  wages  would  stand  condemned  if  it 
precluded  all  chance  of  higher  ones  hereafter;  while 
a  system  that  should  begin  with  a  low  rate  and  afford 
a  guaranty  that  it  should  grow  higher  eacL  year  to 
the  end  of  time  would  have  the  most  important 
merit  which  any  system  could  possess.  The  outlook 
it  would  afford  for  humanity  would  far  outweigh  a 
measure  of  hardship  imposed  on  the  present  gen- 
eration, A  present  purgatory  with  dynamic  capa- 
bilities must  in  the  end  excel  any  earthly  para- 
dise which  is  held  fast  in  a  stationary  state. 

We  may  represent  the  resultant  of  the  actual 
growth  of  population  and  of  capital  by  the  follow- 
ing figure :  — 


tig  I 

hi] 


RATE  OF 
WAGES  *T  THF 
MCINNING  OF 

THE  CtNTuSr 


-----^^^OF.^.0. 


A    I 


3426789    10 


0  BATE  OF 
OF  WAGES  AT 
THE  END  OF 
TM£  CENTURY 


!*'asr^ 


318 


ESSENTIALS   OF   ECONOMIC   THEORY 


Measuring  time  by  decades  along  the  horizontal 
base  line  and  the  rate  of  wages  at  the  beginning  of 
a  century  by  the  hue  AB,  we  represent  the  increase  in 
the  pay  of  labor  which  would  be  brought  about  by  an 
increase  of  capital  not  counteracted  by  any  other 
influence  by  the  dotted  line  BC,  and  the  reduction 
which  woukl  be  caused  by  an  increase  of  population 
by  the  dotted  line  BE.  The  line  BD  describes  tlie 
resultant  effect  of  these  two  changes  acting  together 
on  the  supposition  that  during  the  latter  part  of  the 
century  the  growth  of  population  is  somewhat  re- 
tarded and  that  the  increase  of  capital  is  the  pre- 
dominating influence. 

We  may  furtlier  represent  the  change  in  the  rate 
of  wages  which  is  caused  by  improvements  in  method 
and  organization  by  lines  rising  above  the  one  which 
expresses  the  trend  of  wages  as  it  is  affected  only  by 
an  increase  of  capital  and  of  population. 

^  AF  measures 
time  as  before  ami 
AB  the  rate  of  pay 
at  the  beginning  of 
the  century.  The 
dotted  line  BE  rep- 
resents the  rise  in 
wages  due  to  the 
increase  of  capital, 
as  it  more  than  counterarts  the  growth  of  popula- 
tion. The  rise  of  the  line  BD  above  BC  repn^seiits 
the  additional  increase  in  wages  which  is  brought 
al)out  by  improvements  of  method,  and  finally,  the 
rise  of  BC  above  BD  expresses  the  further  addition 
to  the  p.qy  of  Inhnr  which  comes  by  reason  of  im- 
proved organization.    The   ui)permost  line  BC  de- 


.^yf^m^^m^\.<^m:^'t^m 


CAPITAL   AND   CHANGES    OF   METHOD 


319 


scribes  the  resultant  of  all  the  dynamic  changes  on 
the  supposition  that  they  act  in  a  natural  way. 

It  will  be  seen  that  BC  at  first  rises  above  BD  rap- 
idly and  later  runs  nearly  parallel  with  it.  This 
expresses  the  fact  that  while  gains  insured  by  or- 
ganization may  continue  for  a  long  period,  the  amount 
of  them  does  not  greatly  increase  after  a  fairly  effi- 
cient type  of  organization  has  been  secured.  On  the 
other  hand,  the  fact  that  BD  rises  above  BE  by  a 
wider  and  wider  interval  expresses  the  fact  that 
gains  which  come  from  technical  improvements  may 
increase  for  an  indefinitely  long  time. 

The  Rate  of  Interest  contrasted  with  the  Absolute 
Amount  of  it;  this  Amount  Increasing.  —  The  changes 
which  make  wages  rise  cause  interest  to  fall  and 
there  would  seem  to  l^  a  partial  offset  for  the  general 
gain;  but  the  chief  cause  of  a  declining  rate  of  in- 
terest is  an  increase  of  the  total  amount  of  capital. 
The  size  of  the  income  which  comes  to  the  capitalists 
as  a  class  from  their  entire  invested  wealth  grows 
larger  wherever  the  amount  of  the  fund  increases 
more  rapidly  than  the  rate  of  interest  lalls.  A 
million  dollars  yielding  four  per  cent  gives  a  larger 
income  than  a  half  million  yielding  five  or  six.  It  is 
a  condition  such  as  this  which  we  have  described  in 
outline,  and  it  enables  the  holders  of  investments 
to  receive  a  constantly  increasing  total  return, 
although  the  percentage  yielded  by  a  given  amount 
invested  grows  continually  smaller. 

The  Conditions  of  Increasing  Future  Well-being. — 
The  realization  of  this  resultant  of  all  dynamic 
forces  requires  that  the  rate  of  growth  of  population 
should  he  siihjcrt  tn  a  natural  fheck.  that  the  increase 
of  capital  should  not  be  unduly  retarded,  that  tech- 


i 


t  m 


m 


\k 


320 


ESSENTIALS  OP  ECONOMIC  THEORY 


nical  improvements  should  go  on,  and  that  the  or- 
ganization which  is  effected  should  be  of  the  kind 
which  makes  for  efficiency  but  not  for  monopoly. 
Competition  must  be  kept  alive.  In  altered  ways, 
indeed,  the  essential  power  of  it  must  forever  dominate 
the  industrial  system,  as  it  will  do  if  the  state  shall 
do  its  duty  and  not  otherwise.  A  dynamic  society 
requires  a  dynamic  government  whose  enlarging  func- 
tions are  shaped  by  economic  conditions. 


Vf 


t 

L'  ti 


'    i     ^ 


CHAPTER   XIX 


THE  LAW  OF  POPULATION 


Since  the  optimistic  conclusion  reached  in  the 
preceding  chapter  is  contingent  on  an  increase  of 
wealth  which  is  not  neutralized  by  an  increase  of 
population,  it  remains  to  be  seen  whether  the  popula- 
tion tends  to  grow  at  a  rate  that  gives  reason  to  fear 
such  a  neutralizing.  Does  progress  in  method  and  in 
wealth  tend  to  stimulate  that  enlarging  of  the  num- 
ber of  working  people  which,  in  so  far  as  they  are 
concerned,  would  bring  progress  to  an  end?  Is  the 
dynamic  movement  self-retarding  and  will  it  neces- 
sarily halt?  The  answer  to  this  question  depends, 
in  part,  on  the  law  of  population. 

The  Malthusian  Law.  —  We  need  first  to  know 
whether  the  growth  of  population  is  subject  to  a  law, 
and  if  so,  whether  this  law  insures  the  maintenance 
of  the  present  rate  of  increase  or  a  retarding  of  it. 
The  law  of  population  formulated  by  Malthus  at  the 
beginning  of  the  last  century  is  the  single  extensive 
and  important  contribution  to  economic  dynamics 
made  by  the  early  economists.  It  was  based  more 
upon  statistics  and  less  on  a  priori  reasoning  than 
were  most  of  the  classical  doctrines.  Even  now  the 
statement  as  made  by  Malthus  requires  in  form  no 
extensive  supplementing,  and  yet  the  change  which 
is  required  is  sufficient  to  reverse  conjph'tely  the  orig- 
inal conclusion  "  the  teaching.  Malthusianism  con- 
T  321 


! 


:.  -k 


i  ■ 


mm 


322 


E88KNTIALS   OP  ECONOMIC  THEORY 


stituted  the  especially  "dismal"  element  in  the  early 
political  economy,  and  yet,  as  stated  by  its  author,  it 
revealed  the  possibility  of  a  comfortable  future  for 
the  working  class.  One  might  look  with  cheerful- 
ness on  every  threatening  influence  it  described 
if  he  could  be  sure  that  the  so-called  "standard  of 
living"  on  which  everything  depends  would  rise. 
The  difficulty  lay  in  the  fact  that  the  teaching  afforded 
no  evidence  that  it  would  thus  rise.  The  common 
impression  of  readers  was  that  it  was  destined  to 
remain  stationary  and  that  too  at  a  low  level.  The 
workmen  of  Malthus's  time  were  not  accustomed 
to  getting  much  more  than  the  barest  subsistence, 
and  not  many  economists  expected  that  they  would 
get  much  more,  even  though  the  world  generally 
should  make  gains. 

The  Popular  Inference  from  the  Malthusian  Law.  — 
If  we  state  the  conclusion  which  roost  people  drew 
from  the  Malthusian  law  in  its  simple  and  dismal  form 
it  is  this:  Whenever  wages  rise,  population  quickly 
increases,  and  this  increase  carries  the  rate  of  pay 
down  to  its  former  level.  The  earnings  of  labor 
depend  upon  the  number  of  laborers;  a  lessening  of 
the  number  of  workers  raises  their  earnings  and  an 
increase  depresses  them ;  and  therefore,  if  every  rise 
in  pay  brings  about  a  quick  increase  of  population, 
labor  can  never  hold  its  gains;  every  rise  is  the  cause 
of  a  subse(}uent  fall. 

Malthus's  Qualification  of  his  Statement.  —  As  we 
have  said,  Malthus  so  qualified  his  statement  that 
he  did  not  positively  assert  that  thi.s  would  describe 
the  experience  of  the  future;  tlie  fall  in  pay  that 
shoiild  follow  the  increa.^e  of  numbers  might  nut 
always  be  as  great  as  the  original  rise,  and  when  a 


fyfjfjjr^i  ^iJ.* 


THE   LAW  OF  POPULATION 


323 


later  rise  should  occur  the  fall  following  it  might  be 
less  than  thit,  second  rise.  In  some  way  workers 
might  insist  upon  a  higher  standard  of  living  after 
each  one  of  their  periodical  gains. 

Why  this  Qualification  is  not  Sufficient.  —  The 
mere  fact  that  the  standard  of  living  may  conceiv- 
ably rise  does  not  do  much  to  render  the  outlook 
cheerful,  unless  we  can  find  some  good  ground  for 
supposing  that  it  will  rise  and  that  economic  causes 
will  make  it  do  so.  We  should  not  depend  too  much 
on  the  slow  changes  that  education  may  effect,  or 
base  our  law  on  anything  that  presupposes  an  im- 
provement in  human  nature.  We  need  to  see  that  in 
a  purely  economic  way  progress  makes  further  progress 
easier  and  surer  and  that  the  gains  of  the  working 
cla.ss  are  not  self-annihilating  but  self-perpetuating. 
We  may  venture  the  assertion  that  such  is  the  fact: 
that  when  workers  make  a  gain  in  their  rate  of  pay 
they  are,  as  a  rule,  likely  to  make  a  further  gain 
rather  than  loss.  While  there  must  be  minor  fluc- 
tuations of  wages,  the  natural  and  probable  effect  of 
economic  law  is  to  make  the  general  rate  tend  steadily 
upward,  and  nothing  can  stop  the  rise  but  perversion 
of  the  system.  Monopoly  may  do  it,  or  bad  govern- 
ment, or  extensive  wars,  or  anarchy  growing  out  of  a 
struggle  of  classes;  but  every  one  of  these  things,  not 
excepting  monopoly,  would  naturally  be  temporary, 
and  even  in  spite  of  thorn,  tlie  upward  trend  in  the 
earning  pow(>r  of  labor  should  assert  itself.  Instead 
of  being  hopelessly  sunk  by  a  weight  that  it  cannot 
throw  off,  the  labor  of  the  future  bids  fair  to  be  buoyed 
up  by  an  influence  that  is  irrepressible. 

Rcfutatiimf!  of  Malthusianism.  — The  Malthusian 
law  of  population  has  been  so  frequently  "  refuted  "  as 


:;  bl 


l> 


^'t 


i'if. 


Ill- 


324 


ESSENTIALS   OF   ECONOMIC  THEORY 


to  prove  its  vitality.     It  is  in  the  main  as  firmly  im- 
pressed in  the  belief  of  scientific  men  as  it  ever  was, 
and  some  of  the  arguments  which  have  been  relied 
upon  to  overthrow  it  require  only  to  be  stated  in 
order  to  be  discarded.    One  of  these  is  the  claim  that 
the  statement  of  the  law  is  untrue  because,  during  the 
century  in  which  the  American  continent,  Australia, 
parts  of  Africa,  and  great  areas  elsewhere  were  in 
process  of  occupation,   mankind   has   not   actually 
pressed  on  the  limits  of  subsistence.    No  intelligent 
view  regards  that  fact  as  constituting  anything  but 
an  illustration  of  the  Malthusian  law.    A  vast  ad- 
dition to  the  available  land  of  the  world  would,  of 
course,  defer  the  time  of  land  crowding  and  the  disas- 
trous results  which  were  expected  from  it,  but  with 
the  steady  growth  of  population  the  stay  of  the  evil 
influence  would  be  only  temporary. 

An  Objection  based  on  a  Higher  Standard  of  Living.  — 
The  second  objection  is  also  an  illustration  rather 
than  a  refutation  of  the  Malthusian  doctrine;  it 
asserts  that  the  standard  of  living  is  now  higher  than 
it  was,  and  the  population  does  not  increase  fast 
enough  to  force  workers  to  lower  it.  Malthus's 
entire  conclusion  hung  upon  an  if.  The  rate  of  pay 
conformed  to  a  standard,  and  if  that  standard  were 
low,  wages  would  be  so;  while  if  it  were  higher, 
wages  would  be  higher  also. 

The  Real  Issue  concerning  the  Doctrine  of  Popula- 
tion.—There  is  a  real  incompleteness  in  all  such 
statements.  Does  the  standar  I  of  living  itself  tend 
to  rise  with  the  rise  of  wages  and  to  remain  above  its 
former  level  ?  When  men  make  gains  can  they  hold 
them,  or,  at  any  rate,  some  part  of  them,  or  must  they 
fall  back  to  the  level  at  which  they  started?    And 


THE    LAW   OF   POPULATION 


325 


this  Rmounts  to  asking  whether,  after  a  rise  in  pay, 
there  is  time  enough  before  a  fail  might  otherwise  be 
expected  to  allow  the  force  of  habit  to  operate,  to 
accustom  the  men  to  a  better  mode  of  living  and  fore- 
stall the  conduct  that  would  bring  them  down  to  their 
old  pasition.  The  standard  of  living,  of  course,  will 
affect  wages  only  by  controlling  the  number  of  labor- 
ers, and  the  discouragement  due  to  Malthusianism 
lies  in  the  fact  that  it  seems  to  say  that  the  num- 
ber of  workers  is  foreordained  to  increase  so  quickly, 
after  a  rise  in  wages,  as  to  bring  them  to  their  old 
level.  Whether  it  does  or  does  not  do  this  is  a  ques- 
tion of  fact,  and  the  answer  is  a  very  clear  one.  The 
higher  standards  actually  have  come  from  the  higher 
pay,  and  they  have  had  time  to  establish  themselves. 
Subsistence  wages  have  given  place  to  wages  that 
provided  comforts,  and  these  again  to  rates  that  pro- 
vided greater  comforts  and  modest  luxuries ;  and  the 
progress  has  continued  so  long  that,  if  habit  has  any 
power  whatever,  there  is  afforded  even  by  the  Mal- 
thusian  law  itself  a  guarantee  that  earnings  will  not 
fall  to  their  former  level  nor  nearly  to  it. 

A  Radical  Change  in  Theory.  —  Progress  is  self- 
perpetuating.  In.steafl  of  insuring  a  retrogression,  it 
causes  further  progress.  The  man  who  has  ad- 
vanccfl  from  the  position  in  which  he  earned  a  bare 
subsistence  to  one  in  which  he  earns  comforts  is,  for 
that  very  reason,  likely  to  advance  Tarther  and  to 
obtain  the  mode.st  luxuries  which  api><_ar  on  a  well- 
paid  workman's  budget.  "To  him  that  hath  shall 
be  given,"  and  that  by  the  direct  action  of  economic 
law.  This  is  a  radical  doparturc  from  the  Malthusian 
conclusion. 

Three  Possible    Conditions  for    the   Wage-earning 


I 


326 


EaSENTlALS   OF    ECONOMIC   THICORY 


11 


Class.  —  Workers  are  in  one  of  three  possible  condi- 
tions :  — 

(1)  They  may  have  a  fixed  standard  and  a  very 
low  one.  Whenever  they  get  more  than  this  stand- 
ard requires,  they  may  marry  early,  rear  large  fam- 
ilies, and  see  their  children  sink  to  their  own  original 
condition. 

(2)  They  may  have  a  fixed  standard,  but  a  higher 
one.  They  may  be  unwilling  to  marry  early  on  the 
least  they  can  possibly  live  on,  but  may  do  so  as  soon 
as  their  pay  affords  a  modicum  of  comfort. 

(3)  They  may  have  a  progressive  standard.  There 
may  be  something  dynamic  in  their  psychology,  and 
it  may  become  a  mental  necessity  for  them  to  live 
better  and  better  with  advancing  years,  and  to  place 
their  children  in  a  higher  status  than  they  themselves 
ever  obtained. 

A  Historical  Fact.  —  The  manner  in  which  Malthus 
was  actually  interpreted  was  as  much  due  to  the  con- 
dition of  workers  in  his  day  as  to  anything  which  he 
himself  said.  It  was  small  comfort  to  know  that,  un- 
der the  law  of  population,  wages  might  conceivably 
become  higher  and  remain  so  because  of  a  higlu-r 
standard  of  living,  provided  the  higher  standard  was 
never  attained.  Facts  for  a  long  time  were  discourag- 
ing. In  due  time  they  changed  for  the  better.  The 
opening  of  vast  areas  of  new  land  made  its  influence 
felt.  It  raised  the  pay  of  labor  faster  than  the 
growth  of  population  was  able  to  bring  it  down. 
This  had  the  effect  of  establishing,  not  only  a  higher 
standard,  but  a  rising  standard,  and  as  one  generation 
succeeded  another  it  became  habiiualeii  to  a  better 
mode  of  living  than  had  been  possible  before.  It 
was  the  sheer  force  of  the  new  land  supplemented 


W^ 


THF.    LAW   OF    POPULATION 


327 


by  new  capital  and  nrw  mfthod?"  of  industn'  that 
accompli.«hf<l  thi.-.  It  pii«hc<l  wae^'s  upward,  in 
spite  of  evenlhing  that  would  in  itM-lf  have  pulled 
them  down. 

A  Retarded  Grouth  of  Population.  —  If  Malthu.«ian- 
i=m,  as  most  people  understoofl  it,  wr-re  true,  popu- 
lation fihould  inrrf'a.«f'  most  rapidly  dunng  this  period 
of  great  prosperity,  and  should  do  its  best  to  neu- 
tralize the  efffft  of  now  land.-;,  new  capital,  and  new 
methods.  In  somf  plar-cs  thf  in'Toase  ha.'^  l>een  ab- 
normally rapid,  and  in  a  local  way  thL-;  has  had  its 
effect;  but  if  we  include  in  our  vifw  the  whole  of 
what  we  have  flcfine<l  a.~  civilizerl  inrlustrial  society, 
the  rate  of  growth  has  not  hx-come  more  rapid,  but 
ha.s  rather  become  slower  fluring  this  pcriorl.  In  one 
prosperous  countn,-.  namely,  France,  population  ha.s 
become  practically  stationan.".  F^ven  in  America,  a 
countrv'  formerly  of  most  rapid  growth,  the  increa.-*e, 
apart  from  immigration,  has  hfcn  much  slower  than 
it  was  during  the  first  half  of  the  nineteenth  centun,-. 
The  growth  of  population,  then,  may  proceed  more 
slowly  or  come  to  a  halt,  even  while  wealth  and 
earning  powers  are  increasing.  If  this  is  so,  a  fur- 
ther accumulation  of  capital  and  further  improve- 
ments in  method  will  not  have  to  struggle  against 
the  effects  of  more  rapidly  jrrowing  numbers,  anrl 
their  effects  will  becmie  more  marked  a-  the  decades 
pas.s.  There  will  he  a  weaker  and  weaker  influence 
against  the<e  foree-;  whifh  fru'tify  laF>or  and  they  will 
go  on  indefmiti-lv.  end'Aving  working  humanity  with 

more  and  more  [ipiduftive  power  and  with  greater 
'    i •    .  f    ■       ;»-.--     ,-- .  -  i.i-       IT  -  i-i-  -J-  -T 

savings  bank  .ieposits.  invested  capital,  and  comfort- 
able living  may  be  more  and  more  common  among 


! 
I 


11' 

HI,. 


I* 


■  i^. 


'I  .'-J 


328 


ESSENTIALS   OP   ECONOMIC  TffK)RY 


m 


men  who  depend  for  their  income  mainlv  upon  thr 
labor  of  their  hands.  Is  this  mor.'  than  a  possibility  " 
Is  there  an  economic  law  that  in  any  way  guarantees 
it?  Can  we  even  say  that  general  wealth  will,  with- 
out much  doubt,  redound  to  the  permanent  well- 
being  of  the  working  class,  and  that  the  more  there  is 
of  this  prosperity,  the  less  th(>re  is  of  danger  that  they 
will  throw  it  away  by  any  conduct  of  their  own  ?  The 
answer  to  these  questions  is  to  be  found  in  a  third 
historical  fact. 

The  Birth  Rale  Small  among  the  Upper  Classes  in 
Society.  —  In   most   countries   it   is   the   well-to-do 
classes  that  have  small  families  and  the  poor  that 
have  large  ones.    It  is  from  the  interpretation  of  this 
fact  that  we  can  derive  a  most  important  modifica- 
tion of  the  Malthusian  law.    It  is  the  voluntary  con- 
duct of  different  clas.ses  which  determines  whether 
the  birth  rate  shall  be  large  or  small;  and  the  fact  is 
that  in  the  case  of  the  rich  it  is  small,  in  the  case  of 
the  poor  it  is  comparatively  large,  while  in  the  case  of 
a  certain  middle  class,  composed  of  small  employers, 
salaried  men,  professional  men,  and  a  multitude  of 
highly  paid  workers,  it  is  neither  very  large  nor  very 
small,  but  moderate.    In  a  general  way  the  birth 
rate  varies  inversely  as  the  earning  power  of  the 
classes  in  the  case,  though  the  amounts  of  the  varia- 
tions do  not  correspond  to  each  other  with  any  arith- 
metical exactness.     If  one  class  earns  half  as  much 
per  capita  as  another,  it  does  not  follow  that  the 
families  belonging  to  this  class  will  have  twice  as 
many   children.    They   do,   on   the   average,    have 
more  children.    There  is,  then,  at  least  an  encourag- 
mg  probability  that  promoting  many  men  from  the 
third  class  to  the  middle  class  would  cause  them  to 


'yj^^.mm 


THE   LAW   OF   POPULATION 


329 


conform  to  t  le  habit  of  the  class  they  joined.  This 
class  is  at  pr'^sent  largely  composed  of  persons  who 
have  risen  fro  n  the  lowest  of  the  classes,  and  any 
future  change  by  which  the  thirtl  class  becomes 
smaller  and  tht  second  larger  would  doubtless  retard 
the  .-werage  birth  raw  of  the  whole  society. 

Motives  f(/r  the  Conduct  of  the  Different  Classes.  — 
History  and  present  fac.   <vre  again  enlightening  in 
that  they  reveal  the  chief  motive  that  determines  the 
rapidity  of  the  increase  of  the  population.    When 
children  become  self-supporting  from  an  early  age, 
the  burden  routing  on  the  father  when  he  has  a  com- 
paratively small  number  of  them  is  as  large  as  it  ever 
will  be.     If  they  can  earn  all  they  cost  when  they  reach 
the  age  of  ten,  the  maintenance  of  the  children  will 
cost  as  much  when  the  oldest  child  has  reached  that 
age  as  it  will  cost  at  any  later  time.    Even  though  one 
were  added  to  the  family  every  year  or  two,  one  would 
graduate  from  the  position  of  depenrlence  ever>'  year 
or  two,  and  the  number  constantly  on  the  father's 
hands  for  support  would  probably  not  exceed  five  or 
six,  however  large  the  total  number  might  become. 
The  large  number  of  rhildren  in  faiuilies  of  early 
New  England   and   the  hirge   number  of  them   in 
French  Canadian  families  at  a  recent  date  were  due 
to  the  fact  that  land  was  abundant,  expenses  were 
small,  and  a  boy  of  ten  years  working  on  the  land 
could  put  into  the  family  store  as  much  as  his  main- 
tenance took  out  of  it.    The  food  problem  was  not 
grave   in    those    primitive   places   and    times,   and 
neither  were  the  problems  of  clothing,  housing,  and 
etiucating.     It  is  in  lliis  last  item  that  tlie  key  to  a 
change  of  the  condition  lay,  for  the  time  came  when 
more  educat.  g  was  reciuired,  when  the  burden  of 


-  f 


l^- 


i 


\ 

E 


330 


ESSENTIALS  OF  ECONOMIC  THEORY 


II 


'Ml 

1' 


maintaining  children  continued  longer,  and  a  condi- 
tion of  self-support  was  reached  at  no  such  early 
date  as  it  had  been  in  rural  colonies. 

The  Effect  of  Endowing  Children  with  Education  and 
with  Property.  —  When  children  need  to  be  thoroughly 
educated,  the  burden  of  maintaining  a  family  of 
course  increases.  An  unduly  large  family  means  the 
lowering  of  the  present  .standard  of  living  for  all  and 
a  lowering  of  the  future  .'Standard  for  the  children. 
With  most  workmen  it  is  not  possible  either  to  endow 
many  children  with  property  or  to  e(hi('ate  them  in 
an  elaborate  way.  The  fear,  theref(.rc,  of  losing 
present  comforts  for  the  family  as  a  wliolc  and  the 
fear  of  losing  caste  by  seeing  the  family  (hop,  ;  ' 
a  later  date,  into  a  lower  social  class,  are  arguments 
against  large  families. 

Why  Economic  Progress  perpetuates   Itself.  —  The 
economic  motive  which  causes  progress  to  perpetuate 
itself  and  to  bring  about  more  and  more  progress  is 
the  determined  resLstence  to  a  fall  from  a  .'social  status. 
The  family  must  not  lose  ca.ste.     It  must  not  sacrifice 
any  of  the  absolute  comforts  to  which  it  is  accustomed, 
particularly  when   so  doing  entails  a  degradation. 
Such  is  human  nature  thai  the  unwillingness  to  give  up 
something  to  which  one  is  accustomed  is  a  far  .stronger 
spur  to  action  than  the  ambition  to  get  .something  to 
which  one  is  not  accustomed;  and  a  .social  rank  once 
attained  is  not  surrenderofi  without  a  struggle.     A 
tonacious  maintenance  of  status  is  the  motive  which 
figures  most  prominently  in  controlling  the  growth  of 
population  and  the  increase  of  capital.   The  rich  main- 
tain the  status  of  the  family  by  means  of  in\  sted 
wealth,  the  poor  (io  it  by  education,  and  members  of 
the  middle  class  do  it  by  a  combination  of  tht  two. 


THE    LAW    OF    POPULATION 


331 


Status  maintained  hy  Education.  —  In  case  of  wage 
PArners  the  need  of  educating  children  and  the  ad- 
vantages that  flow  from  it  overbalance  the  need  of 
bequeathing  to  them  property ;  and  yet  the  need  of 
bequeathing  property  of  some   kind   is  a  powerful 
motive  also.     It  is  important  to  enable  them  to  pro- 
cure the  tools  of  some  handicraft,  or  to  secure  them- 
selves  against   dangers   from   sickness   or  accident. 
Moreover,  it  is  not  altogether  technical  education 
which  counts  in  this  way.    Culture  in  itself  is  a  means, 
not  only  of  direct  enjoyment,  but  of  maintaining  a 
social  rank.    The  well-informed  person  accomplishes 
directly  what  a  well-to-do  person  accomplishes  in- 
directly, in  that  he  gets  direct  pleasures  from  life 
which  olher  people  cannot  get,  and  he  enjoys  c(m- 
sideration  of  others  and  has  influence  with  them  as 
an  uninformed  person  cannot.    The  need,  therefore, 
of  educating  children  for  the  sake  of  making  them 
good  producers  and  the  need  of  doing  it  for  the  pur- 
pose of  making  them  good  consumers  and  of  enabling 
them  to  make  the  most  of  what  they  produce  works 
against  too  rapid  an  increase  of  ..umbers. 

The  Effect  of  Factory  Legislation.  —  These  motives 
are  powerfully  strengthened  when  they  are  reen- 
forced  by  public  opinion  and  positive  law.  The  am- 
bition of  workers  to  secure  laws  which  will  forbid  the 
employment  of  children  under  the  age  of  sixteen  is, 
in  this  view,  a  reasonable  wish  and  one  that  if  carried 
out  would  tend  to  promote  the  welfare  of  future 
generations.  It  is  doubtless  true  that  this  is  not  the 
sole  motive,  and  some  weight  must  be  accorded  to  the 
desire  to  reduce  the  amount  of  available  labor,  and  to 
protect  adults  who  tend  machines  from  the  competi- 
tion of  children  who  could  do  it  as  well  or  better. 


f  11 


.'? 


332  ESSENTIALS   OF   ECONOMIC   THEORY 

There  is,  however,  an  undefined  feeling  in  the  la- 
borers'  minds  that  when  children  all  work  from  an 
early  age  the  wages  of  the  whole  family  somehow 
become  low,  and  that  it  takes  all  of  them  to  do  for  the 
family  what  the  parents  might  do  under  a  different 
condition.  The  Malthusian  law  shows  how,  in  the 
long  run,  this  is  brought  about.  The  increased 
strength  of  the  demand  for  factory  laws  and  com- 
pulsory education  is  a  positive  proof  of  the  gro^^th 
of  the  motives  which  put  a  check  on  population. 

Absolute  Status  and  Relative  Status  both  Involved  ~ 
The  absolute  comfort  a  family  may  enjoy  and  its  social 
position  are  both  -vt  stake,  and  we  need  not  trouble 
ourselves  by  asking  whether  the  comparative  motive 
—  the  need  of  keeping  pace  with  others  in  the  march 
of  improvement- will  cease  to  act  if  a  whole  com- 
munity advances  together.    We  saw  at  the  outset 
that  this  motive  acts  powerfully  on  a  superior  class 
which  has  before  its  eyes  a  lower  class  into  whose 
rank  some  of  its  members  may  possibly  drop     The 
lowest  class  must  always  be  present,  however  a  com- 
munity may  advance,  and  a  well-to-do  worker  will 
always   dread    falling   into   it.     If   it   should   grow 
smaller  and   t.mller  in  number,  and  if  the  second  of  the 
three  classes  we  are  speaking  of  should  grow  larger 
the  dread  of  falling  from  the  one  to  the  other  would 
not  disappear.     The  relative  status  —  that  which  ap- 
peals to  caste  feeling  and  the  desire  for  the  considera- 
tion of  others-  woul.l  continue  to  be  influential,  as 
well  as  the  desire  for  positive  comforts;  ami  the  mo- 
tive that  depends  on  comparisons  might  even  be  at  its 
strongest  when  the  lowe^t  ckss  should  so  dwindle  that 
fpw  wouhl  ^>e  left  in  it  except  cripples,  the  aged,  or  the 
fceble-mmded.    An  efficient  worker  would  struggle 


THE    LAW    OF    POPULATION 


333 


harder  to  keep  his  family  out  of  such  a  class  than 
to  keep  it  out  of  one  which  would  have  upon  it  only 
the  ordinary  stigma  of  poverty. 

Checks  more  Effective  as  Wealth  Increases.  —  It  is 
clear  that  the  dominant  motives  which  restrain  the 
growth  of  population  act  more  powerfully  on  the  well- 
to-do  classes  than  on  the  poor.  The  need  of  invested 
wealth,  the  need  of  education,  the  determination  to 
adhere  to  a  social  standard  of  comfort  and  to  avoid 
losing  caste,  are  stronger  in  the  members  of  the  higher 
classes  than  in  those  of  the  lower  ones,  and  become 
more  dominant  in  the  community  as  more  and  more 
of  its  members  belong  to  the  upper  and  the  middle 
classes. 

Immediate  Causes  of  a  Slow  Increase  of  Popula- 
tion. —  The  economic  motive  for  a  slow  growth  of 
population  can  produce  its  efft^ct  only  as  it  leads 
to  some  line  of  conduct  which  insures  that  result. 
Means  must  be  adopted  for  attaining  the  end  desired, 
and  when  one  looks  at  some  of  the  means  which  are 
actually  resorted  to,  he  is  apt  to  get  the  impression 
that  an  indispensable  economic  result  is  in  some 
danger  of  being  attained  by  an  intolerable  moral 
delinquency.  Must  the  society  of  the  future  pur- 
chase its  comforts  at  the  cost  of  its  character? 
Clearly  not  if  the  must  in  the  case  is  interpreted 
literally.  A  low  birth  rate  may  be  secured,  not 
at  the  cost  of  virtue,  but  by  a  self-discipline  that 
is  quite  in  harmony  with  virtue  and  is  certain  to 
give  to  it  a  virile  character  which  it  loses  when  men 
jmt  little  restraint  on  their  impulses.  Late  mar- 
riages for  men  stand  as  the  legitimate  effect  of  the 
desire  to  sustain  a  high  standard  of  living  and  to 
transmit  it  to  descendants;    and  late  marriages  for 


% 


hf 


334 


KS8ENTIAL8   OF   ECONOMIC   THEORY 


women  stand  first  among  the  normal  causes  of  a 
retarded  growth  of  population.     Moreover,  the  same 
moral   strength   which   induces  men   to  defer  mar- 
riage  ilictates  a  considerate   and   prudent   conduct 
after  it,  and  prevents  unduly  large  families  without 
entailing  the  moral   injury  which  reckless  conduct 
involves.     On  the  other  hand,  there  may  be  an  in- 
definite   pastponement  of    marriage  by  classes  that 
lack    moral   stamina   and   readily   lapse   into   vice. 
There  are  vicious  measures,  not  here  to  be  named 
in  detail,  which  keep  down  the  number  of  births  or 
increase    the    number    of   deaths,  mostly    prenatal, 
though  the  infanticide  of  earlier  times  is  not  extinct. 
By  strength  and  also  by  weakness,  by  virtue  and 
also  by  vice,  is  the  economic  mandate  which  limits 
the  rate  of  growth  of  population  carried  out.    A 
limit  of  growth  must  be  impo.seil  if  mankind  is  to 
make  the  most  of  itself  or  of  the  resources  of  its 
environment.    There  is  no  great  doubt  that  it  will 
be  so  imposed,  and  the  great  issue  is  between  the 
two  ways  of  doing  it ;  namely,  that  which  brutaliz(>s 
men   and   depraves   them   morally   and   physically, 
antl  that  which  places  them  on  a  high  moral  level. 
Moral    Losses    attending    Civilization.  —  There    is 
little  doubt  that  vice  has  made  gains  which  reduce 
in  a  disastrous  way  the  otherwise  favorable  results 
of  increasing  wealth.     The  "hastening  ills"  that  are 
said   to   attend   accumulating  wealth  and  decaying 
manhood   have  come   in  a  disquieting  degree  and 
forced  us  to  (juaiify  the  happy  conclusions  to  which 
a  study  of  purely  economic  tendencies  leads.     The 
evil  is  not  confined  to  the  realm  of  family  relations, 
but  pervades  politics,  ''high  finance,"  and  a  large 
part  of  the  domain  of  social  pleasures.     The  richer 


THE    LAW   OF   POPULATION 


335 


world  is  the  more  sybaritic  —  self-influlgent  and 
intolerant  of  many  irioral  restraint.s;  and  if  one 
expects  to  preserve  an  unquestioninj^  trust  in  the 
future,  he  must  fiml  a  way  in  which  the  economic 
gains  which  he  hopes  for  can  he  made  without  a 
casting  away  of  ^he  moral  standards  which  are  in- 
dispensable. The  greatest  possible  achievement  in 
this  direction  would  be  an  abandonment  of  vicious 
restraints  on  population  and  a  general  increa.se  of 
the  forethought  and  the  self-command  which  even 
now  constitute  the  principal  reliance  for  holding 
the  birth  rate  within  prudent  limits. 

The  Working  of  MaWiusinnis)n  in  Short  Periods 
as  Contrasted  with  an  Opposite  Tendency  in  Lang 
Ones.  —  There  is  little  doubt  that  by  a  long  course 
of  technical  improvement,  incn-a.sing  capital,  and 
rising  wages,  the  laboring  class  of  the  more  pros- 
perous countries  have  become  accustomed  to  a 
standard  of  living  that  is  generally  well  sustained 
aad  in  most  of  these  countries  tends  to  rise.  There 
is  also  little  uncertainty  that  a  retarded  growth 
of  population  has  contributed  somewhat  to  this 
result.  One  of  the  facts  which  Malthus  ob-:erved 
is  consistent  with  this  general  temlency.  Even 
though  the  trend  of  the  line  which  represents  the 
standard  of  living  \h'  steadily  u{)ward,  the  rise  of 
actual  wages  may  proceed  unevenly,  by  quick  for- 
ward movements  and  pau-es  or  halts,  as  the  general 
state  of  business  i>  flniiri-hing  or  depre^^sed.  In 
"booming"  times  wages  rise  and  in  hart!  times  they 
fall,  though  the  upward  movements  are  greater 
than  the  downward  ones  and  the  total  result  is  a 
gain. 

Now,  such  a  quick  ri.se  in  wages  is  followed  by  an 


I-; 


% 


ill- 


i 


336 


ESSENTIALS   OF    ECONOMIC  THEORY 


;i: 


'I 


increase  in  the  number  of  marriages  and  a  quick  fall 
is  followed  by  a  reduction  of  the  number.  The 
birth  rate  is  somewhat  higher  in  the  good  times  than 
it  is  in  the  bad  times.  Young  men  who  have  a 
standard  of  income  which  they  need  to  attain  before 
taking  on  themselves  the  care  of  wife  and  children 
find  themselves  suddenly  in  the  receipt  of  such  an 
income  and  marry  accordingly.  There  is  not  time 
for  the  standard  itself  materially  to  change  before 
this  quick  increase  of  marriages  takes  place,  and 
the  general  result  of  this  uneven  advance  of  the 
general  prosperity  may  be  expressed  by  the  following 
figure:  — 


The  line  AC  measures  time  in  decades  and  in- 
dicates, by  the  figures  ranging  from  1  to  10,  the 
passing  of  a  century.  AB  represents  the  rate  of 
wages  which,  on  the  average,  are  needed  for  main- 
taining the  standard  of  living  at  the  beginning  of 
the  century;  and  CD  measures  the  amount  that  is 
necessary  at  the  end.  The  dotted  line  which  crosses 
and  recrosses  the  line  BD  describes  the  actual  pay 
of  labor,  ranging  now  above  the  standard  rate  and 
now    below   it.     Whenever  wages    rise    above    the 


THE   LAW    OF   POPULATION 


337 


standard,  the  birth  rate  is  somewhat  quickened, 
and  whenever  they  fall  below  it,  it  is  retarded; 
but  the  increase  in  the  rate  does  not  suffice  to  bring 
the  pay  actually  down  to  its  former  level.  The 
descent  of  the  dotted  line  is  not  equal  to  the  rise, 
and  through  the  century  the  earnings  of  labor  fluctu- 
ate about  a  standard  which  grows  continually  higher. 
The  pessimistic  conclusion  afforded  by  the  Mal- 
thusian  law  in  its  untenable  form  requires  (1)  that 
the  standard  of  living  should  Ik)  stationary  and  low, 
and  (2)  that  wages  should  fluctuate  about  this  low 
standard.  In  this  view  the  facts  would  be  described 
by  the  following  flgure :  — 


f^M 

^  m 

f;f 

t; 

\ 

^1 


ik- 


AC  measures  a  century,  as  before,  by  decades,  and 
the  height  of  BD  above  BC  measures  the  standard 
of  living  prevailing  through  this  time.  The  dotted 
line  crossing  and  recrossing  BD  expresses  the  fact 
that  wages  sometimes  rise  above  the  fixed  standard 
and  are  cjuickly  carried  to  it  and  then  below  it  by 
a  rapid  increa.se  in  the  number  of  the  laborers. 

Members  of  the  Up))er  Classes  not  Secure  against  the 
Action  of  the  Malthiisinn  Law  if  a  Great  Lower  Class 
vi  Subject  to  It.  —-  It  is  clear  that  if  the  workers  are 
to  b(?  protected  from  the  depressing  effect  which 
follows  a  too  rapid  increase  of  population,  the  Mal- 
thusian  law  in  its  drastic  form  must  not  operate 
in  the  ca.se  of  the  lowest  of  the  three  clas.ses,  so 
long   as    that    in   a   numerous   class.     A    restrained 


338 


ESSENTIALS  OP  ECONOMIC  THEORY 


r.i  i 


growth  in  the  case  of  the  upper  two  classes  would 
not  suffice  to  protect  them  if  the  lowest  class  greatly 
outnumbered  them,  and  if  it  also  showed  a  rapid 
increase  in  number  whenever  the  pay  of  its  members 
rose.  The  young  workers  belonging  to  this  class 
would  find  their  way  in  sufficient  numbers  into  the 
second  class  to  reduce  the  wages  of  its  members  to 
a  level  that  would  approximate  the  standard  of  the 
lowest  class.  Under  proper  conditions  this  does 
not  happen;  for  the  drastic  action  of  the  Malthusian 
law  does  not  take  place  in  the  case  of  the  third 
class  as  a  whole,  but  only  in  the  case  of  a  small 
stratum  within  it. 

Countries  similarly  exposed  to  Dangers  from 
Other  Coun/ncs.  —  Something  of  this  kind  is  true 
of  a  number  of  countries  which  are  in  close  com- 
munication with  each  other.  If  a  rise  of  pay  gave 
a  great  impetus  to  growth  of  population  in  Europe, 
and  if  this  carried  the  pay  down  to  its  original  level 
or  a  lower  one,  emigration  would  be  quickened; 
and  although  the  natural  growth  in  America  might 
be  slower,  the  American  worker  might  not  be  ade- 
quately protected.  The  influx  of  foreigners  might 
more  than  offset  the  slowness  of  the  natural  growth 
of  population  in  America  itself.  The  most  important 
illustration  of  this  principle  is  afforded  by  the  new 
connection  which  America  is  forming  with  the  Asiatic 
nations  across  the  Pacific. 


CHAPTER  XX 


m 


THE   LAW  OF  ACCUMULAHON  OF  CAPITAL 

Adam  Smi-^h  and  many  others  have  noticed  that 
the  gro^^1;h  of  capital  varies  with  the  intelligence 
and  the  foresight  of  a  population.  It  should  there- 
fore increase  in  rapidity  as  intelligence  increases. 
A  high  valuation  of  the  future  is  a  mark  of  intel- 
ligence, and  there  is  no  reason  why  an  entirely  rational 
being  should  value  a  benefit  accruing  to  himself  in 
the  future  any  less  than  he  does  a  benefit  accruing 
at  once.  Perfectly  rational  estimates  of  present 
and  future,  if  there  are  no  influences  affecting  the 
choice  except  these  mere  differences  in  time,  njean 
that  the  two  stand  at  par.  It  was  once  supposed 
that  the  di.sjjosition  to  save  from  one's  present 
income  varies  directly  as  the  rate  of  interest  of  the 
capital  which  is  thus  accrued,  and  in  the  main 
this  is  still  regarded  as  a  nearly  self-evident  proposi- 
tion. Abstinence  imposes  a  present  cost  on  any- 
body that  practices  it.  Whosoever  saves  a  dollar 
mi.sses  the  gratification  which  that  dollar  might 
bring.  He  may  regard  that  sacrifice  as  fixed.  It 
causes  him  to  go  without  his  marginal  gratification, 
whatever  that  may  be.  If  interest  for  a  year  amounts 
to  twenty-five  cents,  the  man  has  at  the  end  of  the 
year  one  dollar  and  twenty-five  cents,  with  which  to 
do  whatever  he  may  choose.  He  may  spend  it,  if 
he  will,  and  get  all  the  gratification  that  a  dollar  and 

339 


If 
III 


Mi 


mm 

I 


340 


n 


Ml 


I  n 


fit 

3;i| 


ESSENTIALS   OF  ECONOMIC  THEORY 


a  quarter  can  bring.     If  interest  stands  at  five  por 
cent  per  annum,  his  abstinence  will  bring  him  only 
one  dollar  and  five  cents  a  year,  an*'  that,  or  wliat- 
ever  he  can  get  by  means  of  it,  is  a  smaller  benefit 
than  the  one  he  could  get  for  one  dollar  and  a  quarter. 
If  it  is  barely  worth  while  to  go  without  something 
now  in  order  to  have  a  dollar  and  five  cents  in  the 
future,  it  is  more  than  w.^rth  while  to  do  it  in  order 
to  have  a  dollar  and  a  (juarter  at  the  same  future 
date.     If  a  man  is  induced  to  save  only  a  dollar,  for 
the  sake  of  having  a  dollar  and  five  cents  at  the 
end  of  the  year,  why  should  he  not  save  two  dollars, 
in  order  to  have  two  dollars  and  a  half  at  that  time  ? 
Why  should  not  the  amount  of  his  present  privation 
increase,  when  the  surplus  of  benefit  he  can  gain 
by  it  at  a  future  date  grows  greater?    Such  is  the 
reasoning,   and   it   seems   entirely   plausible,    if   we 
assume  that  what  the  man  loses  is  the  gratification 
he  might  have  by  spending  his  dollar,  and  that  what 
he  gains  is  the  benefit  of  spending  it  and  its  accumu- 
lation of  interest  at  the  end  of  the  year.     The  as- 
sumption is  that  the   man   proposes  at   a   certain 
future  date  to  spend  the  principal   or  the   capital 
which  he  acquires  by  saving  in  the  present,  together 
with  whatever  it  may  have  earned  as  interest;  that 
he  measures  the  personal  benefit  which  he  can  get  by 
this  spending,  and   finds   the  larger  benefit    bettor 
worth  a  fixed  sacrifice  in  the  present  than  a  small 
one. 

The  Actual  Purpose  of  Abstinence.  —  Most  capital 
is  saved  with  no  expectation  of  ever  spending  the 
principal.  The  motive  is  a  perpetual  income,  which 
the  capital  will  earn.  What  the  man  appraises 
in  his  own  mind  i.s  not  the  personal  tenefit  he  can 


THE   LAW  OF   ACCUMULATION   OF  CAPITAL      341 


get  by  s|M'n(ling  a  dollar  and  five  cents  at  the  end 
of  the  year;  it  is  the  benefit  that  will  come  from 
spending  five  cents  at  the  end  of  the  first  year,  an- 
other five  cents  at  the  end  of  a  second,  and  a  more 
or  less  similar  anujunt  at  the  end  of  every  year  that 
shall  follow.  It  is  a  perpetual  income,  and  as  the 
man's  life  is  limited,  the  greater  part  of  it  must 
accrue  to  others  than  hims<lf.  The  satisfaction 
which  lie  wHl  get  from  it  near  the  close  of  his  own 
life  comes  altogether  from  the  prospect  of  passing 
the  principal  unimpaired  to  others  and  in  assuring 
to  them  and  to  their  successors  the  perpetual  income 
which  the  foundation  yields. 

Even  on  this  basis  it  might  be  supposed  that  a 
large  |)erpetual  income  would  offer  a  greater  induce- 
ment to  save  than  a  small  one,  and  therefore  that 
the  amount  of  saving  would  Ix*  greater  when  the 
rate  of  interest  was  higher,  ."his  would  b<'  true  if 
the  importance  of  the  perpetual  income  could  be 
estimated  in  this  simple  way  by  the  mere  amount 
of  it. 

Conditions  affecting  the  Importance  of  a  Future 
Inrame.  —  The  importance  of  a  future  income  may 
be-  large  because  of  the  prosp(>ctive  helplessness  or 
poverty  of  the  one  who  expecis  to  enjoy  it.  A 
workman  may  save  at  a  great  present  cost  to  him- 
self in  order  to  provifle  for  old  age  or  sickness,  in 
which  cHso  the  income  from  the  savings,  and  often 
the  savings  themselves,  wiuld  be  the  means  of 
averting  a  great  c;i!,imit\ .  To  make  one's  self 
secure  against  privation  ui  the  future  is  worth  more 
than  to  add  (o  one.s  romforts  in  the  present.  If 
a  certain  minimum  amount  wrre  needed  to  avert 
starvation  at  the  end  of  a  man's  life,   he  should 


Hi 


A 


\i 


V 

f . 


1' 


i 


■H 


*l|t 


342 


ESSENTIALS  OF  ECONOMIC  THEORY 


secure  that  amount  at  all  hazards,  howpvor  much 
that   may   trench  on   his   present   comforts.     Now, 
as  the  amount  which  he  can  have  at  the  end  of  his 
life  depends  largely  on  the  rate  of  interest  which 
his  savings  will  earn,  during  such  time  as  they  may 
remain   in   a   productive  shape,   it   will   take   moro 
positive  abstinence  on  his  part  to  keep  himself  from 
starvation  when  the  rate  of  interest  is  low  than  it 
will  when  the  rate  is  high.     If  there  were  no  interest 
at  all,  he  would  have  to  put  by  from  his  income 
his  entire  old-age  fund.     If  the  rat;  were  a  hundred 
per  cent  per  annum,  taking  a  very  small  part  of  the 
fund  out  of  the  income  of  his  active  years  would 
suffice,  since  the  fund  itself  would  earn  the  remain- 
der.    Is  the  income  which  is  provided  for  the  future 
to  be  treated  as  a  variable  amount  in  addition  to 
some  other  income,  or  is  it  to  be  regarded  as  a  fixed 
amount,  which  is  needed  for  some  definite  purp  •  •? 
On  the  answer  to  this  question    lepends  the  entire 
iasue  as  to  whether  a  low  rate  of  intei-st  or  a  high 
O'  ?  affords  the  larger  incentive  for  saving. 

Fuhire  Incomes  More  or  Less  Fixed  usually  Needed. 
—  Recent  writers  have  called  attention  to  the  fact 
that  in  many  cases  saving  has  the  providing  of  a 
definite  future  income  in  view.  The  owner  of  a 
landed  estate,  who  intends  to  leave  it  to  a  son,  may 
try  to  provide  from  his  rents  an  endowment  which 
will  save  from  want  or  from  an  unhappy  api)roach 
to  want  his  daughters  and  his  younger  sons.  He 
might  accomplish  this,  indeed,  without  any  pres- 
ent saving  by  putting  rent  charges  or  mortgages 
upon  his  land,  but  th.«it  would  trench  on  the  incoino 
which  his  heir  can  derive  from  it.  It  would  reduce 
the  establishment  which  the  heir  can  maintain  and 


^c^^^ 


mm^mmMm^. 


THE  LAW  OP  ACCUMULATION  OF  CAPITAL  343 

cause  him  to  fall  out  of  the  class  to  which  his  father 
has  belonged.  Ilather  than  do  this,  the  present 
owner  will  usually  reduce  the  present  standard  of 
living  of  the  entire  family  and  try  to  make  sure  that 
its  future  standard  shall  not  fall  below  the  one  thus 
established.  It  seems  better  to  maintain  the  some- 
what lower  standard  through  a  series  of  generations 
than  lake  the  present  mode  of  living  more  lux- 
ur .  .     J  I,  ihe  co«t  of  unclassing  one's  self  and  one's 

h      .-S    .  '     a     i;lt.  ,       '■        . 

'.-r,'  -'  ,  re  Underestimated. — To  the 
;.i  ;.  \i  M  I  this  familiar  fact  it  appears 
■.r  t,  iy  -i  ,  ..tial  amendment  of  the  general 
.  ''  I  .'  '  igh  rate  of  interest  insures  more 
n  .  .  .V  n.ie,  and  the  inference  which  one 
■  .;. is  Tom  this  supposeii  fact  is  that 
•s   is  still   supposed,   reduces   the 


-■■•[,  ■ 

1,  ;( (' 


I- 


t 


;li 


gro^.iM      .V 

incentivi  ioi  me  accumulation  of  more  wealth. 
Such  an  accumulation  is  a.i  essential  part  of  general 
progress  and  is  practically  necessary  for  sustaining  the 
rato  of  wages.  Here,  then,  if  this  suppasition  is  true, 
we  might  sec  an  important  influence  tending  to  bring 
progress  to  a  standstill.  Great  wealth  as  the  result 
of  profosp,  a  reduced  motive  for  acquiring  still 
further  wealth,  a  retarding  of  progress  —  such 
would  be  the  sequence.  Dynamics  would  thus  be, 
in  a  very  important  r<-  pect,  self-retarding  if  not 
self-halting. 

Future  Standards  of  L,..ng  the  Important  Eletnent. 
—  The  ivctual  fact,  as  we  may  venture  to  affirm, 
is  that  the  standards  of  living  which  need  to  be 
maintainof!  in  the  future  are  the  all-important 
element  in  the  case.  To  the  laboring  man  it  is  ncces- 
sarv  to  avoid  .starvation  or  the  workhouse:    to  +he 


!"■ 


\% 


•'.1 
11 

f  i. 


m 


I' 


344 


ESSENTIALS  OP  ECONOMIC  THEORY 


well-paid  artisan  it  seems  necessary  to  do  this  and 
to  make  for  his  children  a  provision  which  will  keep 
them  in  the  same  cidss  with  himself.  To  the  capi- 
talist who  by  successful  business  has  raised  himself 
above  the  artisan  class  it  seems  necessary  to  keep 
his  children  above  the  rank  from  which  he  has  lifted 
the  family;  and  the  same  principle  applies  to  all 
the  wealthier  clashes.  The  tenacity  with  which 
a  man  holds  to  a  station  in  life  outweighs  his  desire 
to  add  to  his  own  present  luxuries,  and  his  ambition 
to  keep  his  children  in  a  certain  station  far  out- 
weighs his  desire  to  add  to  their  present  luxuries. 

The  Importance  of    Future  Standards  not  affected 
by  the  Fact  that  Men  differ  in  Altruism.  —  This  does 
not  at  all  raise  the  question  how  many  people  care 
as  much  for  their  children  as  they  do  for  themselves. 
That  is  not  the  principle  at  issue      In  so  far  as  men 
do  care  for  their  children  the  end  they  seek  for  them 
is  to  enable  them  to  avoid  what  seems  like  a  dis- 
aster, rather  than  to  make  positive  gains  in  the  way 
of  comfortabk'  living.     Even  in  the  case  of  tho.so 
who   have   little   altruism,  such    provision   as   they 
make  for  descendants  is  inspired  by  the  desire  to 
keep  them  within  a  certain  cla.ss  more  than  by  any 
computation    of    how    many    comforts    or    luxuries 
a  surplus  income  of  any  amoimt  might  give  them. 
Whatever  provision   for   children   a  .selfish   o"  dull 
person   makes  is  dictated  by  the  .same  motive  that 
incites  him  to  make  provision  for  his  own  future, 
and  in  both  cases  it  is  chiefly  the  maintenance  of 
a  standard  that  he  asually  has   in   mind. 

The  Principle  not  invalidated  bif  the  Fact  that 
Forethoucjht  is  often  \Vcak.~\\\  the  motives  for 
saving  may  Ix-  unduly  weak.     The  man  mav  care 


•ii< 


THE    LAW   OF   ACCUMULATION   OF   CAPITAL      345 

far  less  for  the  future  than  he  should  do,  and  may 
make  an  unreasonably  small  provision  for  it.  In- 
capacity to  estimate  the  importance  of  this  provi- 
sion, as  well  as  the  degree  of  selfishness  which  ex- 
cludes the  exercise  of  self-<]enial  for  the  benefit  of 
others,  are  not  the  only  reasons  for  this  disregard 
of  the  future.  There  is  an  optimism  which  is  natural ; 
and  a  religious  faith  which  bi<is  one  not  to  take  un- 
duly anxious  thought  for  the  morrow  may  occasion- 
ally be  carried  to  the  harmful  length  of  justifying 
a  neglect  of  coming  years  and  their  needs.  An 
intelligent  trust  in  Providence,  however,  incites 
a  mar  to  do  his  own  full  duty,  and  it  is  the  Ix'tter 
men  who  do  the  most  to  avert  future  evils  from 
their  families.  The  principle  that  we  are  maintain- 
ing applies  as  completely  in  the  cases  of  those  who 
make  small  provision  for  the  future  as  it  does  in  any 
others.  In  the  majority  of  cases  whatever  they 
do  save  is  set  aside  chiefly  for  the  maintenance  of 
some  standard  of  living  by  those  who  get  the  h-nefit 
of  it;  and  to  mainta :;  any  standard  whatever, 
whether  high  or  low,  requires  a  larger  fortune  whon 
interest  is  low  than  it  does  when  interest  is  high. 
Forethought  limited  in  the  Length  of  Time  it  Covers. 
—  There  is  little  danger  that  we  make  any  mistake 
in  ascribing  to  the  dreod  of  falling  below  a  stamlard 
of  living  more  influence  on  the  accunuilation  of 
capital  than  any  othnr  motive  exerts.  This  will 
be  clearer  if  we  look  at  the  actual  manner  in  which 
present  and  future  are  estimated  and  com|)ar(M|. 
The  fact  is  not  that  most  people  care  unduly  little 
for  all  future  iK'ncfits  as  compared  with  |)r(',s('nt 
ones,  as  it  is  that  they  throw  ofT  responsibility  for 
all  the  future  Ixnond  a  liniitetl  period.    The  jut- 


'    ill 
1 

1     a 

^=1 

"A 

i-y 


346 


E88E>mAL8   OF   ECONOMIC  THEORY 


I    ' 


^1 


ill 


II 


spective  does  not  reduce  the  size  of  remote  objects 
unduly  as  often  as  it  cuts  off  the  view  of  them  al- 
together.    In  looking  through  coming  years  a  man 
is    subject    tc    a    certain    economic    myopia.     One 
might  compare  what  he  sees  with  what  a  man  sees 
in  a  foggy  atmosphere,  if  it  were  not  for  the  fact 
that  the  view  of  comparatively  near  objects  is  clear. 
It  is  as  though  a  circle  of  fog  surrounded  him  and 
cut  off  somewhat  abruptly  the  view  of  everything 
that  was  far  away.     Fo'-  a  short  distance  the  man 
sees    everything    with    comparative    clearness,    but 
the  limitlo.ss  spaces  that  lie  beyond  he  sees  not  at 
all.     We  have  seen  that  the  amount  of  abstinence 
he  will  practice  now  for  the  sake  of  what  ho  or  others 
will  gain  later  varies  as  he  is  rational   or  foolish, 
unsciash  or  selfish,  and  it  is  also  true  that  the  length 
of  his  outlook  into  the  future  varies  in  the  same 
way.     There   are   all   gradations   of   <"»r-sightednes,s 
among   tliose   who   create   capital;    but   even   com- 
paratively   near-sighted    ones    usually    provide    for 
the  maintenance  of  some  standard  or  other  during 
the  period  that  falls  within   their  range  of  vision, 
and  this  requires  that  they  should  save  more  when 
interest  is  low  than  they  do  when  interest  is  high. 
Marginal  Capitalists. —  In  this  connection,  how- 
ever, it  is  to  be  noted  that  econ-  tnic  inyof)ia  may 
go   to  the  extreme   length   of  making   inen   nearly 
indifferent    to   all    future   standards.     In    this   c{i.<e 
th(-y  constitute  an   exception   to   the  general   rule, 
since   whatever  they  .save,   if  they  s-ive   at  all,   is 
likely  to  l)e  more  when  interest  is  hi^h  than  when 
it  is  low.     They  are  marginal  caf)ita!ists,  who  are 
not    influenced    by   any    J)enefits   except   immediate 
ones   and   only   inquire   how   much   an   investment 


^^^^iMj^mmamM 


•v^>7i^^f;?--'v.^^;.j.:'l 


THE    LAW   OF   ACCUMULATION    OF    CAPITAL      347 


will,  from  the  day  when  It  is  mado,  add  to  thoir 
own  incomes.  The  highei  rate  is  then  the  f^reater 
lure.  Moreover,  other  capitalists,  who  are  inHu(>nced 
mainly  by  regard  for  future  standards  of  living, 
are  somewhat  affected  by  the  immediate  benefit 
which  marginal  savers  have  exclusively  in  view. 
To  the  extent  that  they  are  so,  the  higln-r  the 
rate  of  their  immediate  returns,  the  more  strongly 
are  they  impelled  to  "abstain"  ami  accumulate. 
The  essential  fact  is  that  marginal  capitalists  are 
few  numerically,  and  their  savings  count  for  little 
as  they  enter  into  the  general  fimd,  and  that  most 
capitalists,  including  nearly  all  who  save  great 
amounts,  do  it  chiefly  from  a  de.sire  to  maintain 
thems(>lves  and  their  descendants  on  an  established 
level  of  living.  In  tlu-  main  the  social  motives  for 
saving  are  those  we  hav«  described. 

I'Jnjnijmcnt  largehf  TrU'idixiiral.  —-  There  is  i\  special 
reason  why  a  rational  man,  if  ofTeiid  an  enjoyment 
now  or  later,  at  his  option,  is  quite  likeiy  to  take  it 
later.  Enjoyment  is  mainly  teleological.  It  con- 
sists in  a  conscious  approach  to  a  desirabli-  end.  The 
knowledge  that  one's  efforts  to  attain  a  desiretl  goal 
are  successful  and  that  tlu'  good  thing  is  really  coming, 
sheds  a  light  on  the  present.  Indeed,  it  is  anticipa- 
tion and  memory  which  prolong  any  enjoyment, 
and  of  these  anticipatiot\  is  the  more  effective.  The 
knowledge  that  one  is  at  a  certain  time  to  sail  for  a 
foreign  tour  confers  liefore  the  sailing  an  enjoyment 
which  is  often  more  than  a  foretaste.  It  often  rivals 
tlse  pleasure  that  is  consciously  taken  in  the  trip 
itself.  A  man  may  be  happy  for  years  in  the  [trospect 
of  !i  business  success  or  a  prospeet  of  el(>ctio!i  to  a 
public  office,  and  many  years  of  iiard  labor  in  scien- 


? 


348 


ESSENTIALS   OF   ECONOMIC  THEORY 


tific  investigation  may  be  illuminated  by  the  expec- 
tation of  the  ultimate  discovery  and  its  consequences 
There  .s  a  good  reason  why  even  an  average  man,  as 
well  as  a  wise  one,  will  wish  to  distribute  his  expen- 
ditures over  the  different  periods  of  his  life,  and  to 
give  a  preference  to  the  future  whenever  that  is 
necessary  in  order  to  enable  him  to  hold  through  his 
earlier  years  the  comfortable  assurance  that  his 
later  ones  are  well  provided  for. 


E— 


r 

B 


nil 


Ik 


a 

m 

*' 
*' 


If  the  line  AB  represents  by  its  distance  above  CD 
a  fixed  standard  of  living  during  a  poruni  of  ten  years 
he  highly  rational  man  will  prefer  to  take  something 
from  the  enjoyments  of  the  first  five  and  bestow  them 
on  the  second  five.  The  consciousuess  of  improve- 
ment, of  th,.  fact  that  every  year  will  bring  a  new 
onjoyment  never  before  experienced,  makes  the  whole 
1.  0  brighter  than  it  could  !«>  with  any  other  disposition 
of  he  available  means  of  pleasure.  The  mans  stand- 
ard of  hvmg  during  th<-  whole  ten-year  period  will 
tK.  repr,.s,.nted  by  the  rising  dotte<l  line  EF 

The  Effect  of  Hobbin,j  the  Future.  -  If  a  man  pur- 
sued th,.  opposite  course,  of  taking  something  from 
the  future  to  r.M  to  the  desirHblene.s.s  of  the  present 
thus  establishing  a  falling  standard  of  living,  he  would 
have  to  relinquish  ex-ery  year  something  to  which  he 
was  accustomed,  which  would  cause  him  a  keen  pain 


THE   LAW   OF   ACCl  MLLATIUN   OF   CAPITAL    349 

The  very  excessive  gains  of  the  present  would  tlius 
become  sources  of  unlmppiiHss  at  a  later  perio<l, 
while  the  anticipation  of  the  uucr  unhappinesses  would 
throw  a  shadow  over  tb^  jjirscnt.  The  men  who  in 
spite  of  all  this  live  recklc^ly  an<l  waste  their  present 
substance  do  so,  not  so  much  because  they  under- 
value so  much  of  the  future  as  falls  within  their 
purview,  as  because  they  are  so  extremely  short- 
sighted that  over  nearly  all  of  the  future  they  have 
practically  no  vision  at  all. 

The  Actual  Conduct  of  a  very  Reasonnhir  Man.  — 
The  real  fact  in  the  case  of  a  reasonable  man  is  repre- 
sented by  the  following  figure :  — 


m 


Line  EF  measures  fifty  years  and  line  FG  another 
fifty.  The  heavy  line  AR,  rising  toward  the  right, 
represents  the  rising  standard  of  livingwhich  the  man's 
reason  makes  him  maintain  during  the  period  over 
which  his  vision  is  clear,  while  the  dotted  line  HC 
represents  the  standard  for  which,  in  an  imperfect 
way,  he  makes  provision  during  the  next  fifty  years. 
Over  later  periods  his  vision  does  not  extend  at 
all.  It  loses  clearness  after  the  point  /?  is  pa.sse<l, 
and  in  the  .same  proportion  it  loses  influence  over 
the  man's  conduct.  He  therefore  reconciles  himself 
to  whatever  standard  may  prevail,  even  though  it 
were  a  stationary  one  during  the  latter  part  of 
the  time.     Very  seldom,  however,  would   the  man 


%  I 


n 


91 


If 


if 

"ti 


350 


ESSENTIALS  OF  ECONOMIC  THEORY 


consciously  lower  the  standard  even  during  this  later 
period. 

T}ie  Effect  of  Limited  Vidon  on  the  Valuation  of  a 
Perpetual  Income.  —  This  failure  of  vision,  or  economic 
myopia,  accounts  for  the  fact  that  the  infinite  series 
of  payments  of  interest  that  a  sum  of  invested  capital 
will  earn  do  not  overbalance,  in  the  man's  estimate, 
the  principal  which  he  must  refrain  from  spending  in 
order  to  get  them.  If  intere.st  is  at  five  per  cent,  ab- 
staining from  using  a  hundred  dollars  for  present 
pleasure  will  put  into  the  man's  hands,  in  twenty 
years,  a  sum  equal  to  the  principal,  in  twenty  years 
more  another  like  sum,  and  so  on  ad  infinitum.  The 
man  who  considers  whetlier  he  .shall  save  a  hundred 
dollars  or  spend  it  miglit  be  .said  to  !«•  comparing  the 
importance  of  a  hunilred  pre.s(>iit  dollars  with  that  of 
an  infinite  number  of  future  ones.  In  his  conscious- 
ness the  number  is  not  infinite,  because  his  vi.sion 
does  not  extend  over  much  of  the  future.  The  fact 
of  most  importance,  as  determining  whether  low 
interest  causes  small  savings,  is  that  in  weii,'hing  the 
importance  of  the  dollars  which  will  be  usetl  during 
the  period  over  which  his  vision  ranges  the  average 
man  is  influenced  by  a  desire  to  maintain  some  stand- 
ard of  living,  which  involves  the  more  saving,  the 
lower  the  rate  of  interest. 

The  .iciion  of  the  Motive  for  Saving  on  Minds  of 
Varying  Degrees  qf  Rcascynableness.  —  Not  only  the 
man  who  looks  a  litth;  way  forward,  but  the  man  so 
constituted  that  he  can  content  himself  with  a  falling 
standard,  is  impelled  to  save  more  if  interest  is  low 
than  he  is  if  inter(>st  is  high,  so  long  as  he  deems  it 
necessary  to  maintain  any  standard  at  all:  but  much 
importance  still  attaches  to  the  ciuestion  whether  tlie 


THE   LAW   OF   ACCUMULATION   OF  CAPITAL      351 


Standard  which  the  man  hopes  to  maintain  is  a  rising, 
a  stationary,  or  a  falling  one.  The  average  man, 
indeed,  does  hope  to  maintain  at  least  a  stationary 
standard  during  so  much  of  the  future  as  he  cares 
much  about.  This  mode  of  distributing  pleasures  ap- 
pears in  matters  both  small  and  great.  In  taking  a 
walk  for  plea.sure  one  is  more  likely  to  go  up  a  rising 
grade  first  and  descetid  afterward  than  he  is  to  go  dcnvn 
at  first  and  afterward  lx>ar  the  fatigue  of  climbing. 
While  there  may  l)e  those  who  would  rather  play  in  the 
forenoon  and  work  in  the  afternoon,  when  the  choice 
is  presented  at  the  beginning  of  the  day,  there  are 
certainly  more  among  the  classes  that  society  depends 
on  for  capital  who  would  put  the  work  in  the  forenoon 
and  the  pleasure  in  the  afternoon  or  evening.  If  a 
man  were  taking  a  canoeing  trip  on  a  swiftly  flowing 
stream,  he  would  paddle  his  lx)at  up  the  stream  and 
then  come  down  with  the  current,  rather  than  let  it 
float  down  with  the  current  and  then  paddle  it  back. 
If  it  \)c  thought  that  this  is  true  of  only  a  specially 
rational  mind,  one  may  say  that  the  capitalist  class 
represents  men  who  in  this  respect  are  more  than 
ordinarily  rational.  They  are  generous,  foresighted, 
and  in  their  relation  to  descondants  affcc'tionate.  The 
men  who  really  do  the  saving  for  society  have  more 
to  make  them  think  and  act  in  the  intelligent  way  we 
have  des('ril)eil  than  do  onliiiary  men.  The  mi.ser, 
the  paragon  of  al)stincMce.  can  hardly  be  said  to  Ik? 
the  man  who  thinks  too  niueh  of  future  enjoyments, 
for  he  cont(>mplates  no  such  enjoyments  that  call  for 
spending  money,  for  he  never  means  to  speml  it.  lie 
is  an  abnornuU  type  and  fortunately  a  rare  one. 
With  him  there  is  a  standard  of  posscssiims  to  be 
maintained,  rather  than  one  of  enjoyments,  and  it 


!    1 


^¥. 


M 


!M 


m 


352 


ESSENTIALS   OF   ECONOMIC  THEORY 


is  always  a  rising  standard,  since  he  cares  for  nothing 
so  much  as  to  see  his  possessions  increasing.  To 
make  them  increase  at  any  given  rate  when  the 
direct  earnings  of  capital  are  small  requires  severer 
abstinence  than  it  would  if  the  capital  yielded  a 
larger  return. 

The  Effect  of  an  Increase  in  the  Number  of  Persons 
ivho  seek  to  maintain  a  Rising  Standard  of  Living.  — 
While  it  is  true  that  even  the  half-evolved  intellects 
that  care  little  for  coming  years  do,  if  they  care  for 
them  at  all,  find  themselves  impelled  to  save  more 
cai)ital  when  interest  is  small  than  tliey  do  when 
it  is  large ;  it  is  also  true  that  minds  of  a  high  order 
save  more  than  minds  of  a  low  one.    In  order  to  live 
during  one's  latter  years  just  out  of  danger  of  the 
workhouse,  one  does  not  need  to  trench  deeply  on  the 
comforts  and  pleasures  which  he  is  able  to  enjoy  dur- 
ing the  greater  part  of  his  life ;  but  if  he  is  determined 
to  live  to  the  end  of  his  days  as  well  as  he  has  done  at 
any  time  and  to  help  his  children  to  do  the  same,  he 
must  practice  a  severer  self-denial  and  accumulate 
a  larger  fund.    Still  sharper  Ix'comes  the  alxstinence 
and  still  greater  the  accumulated  fund  where  men  pro- 
vide for  a  future  mo«le  of  living  that  shall  surpass  the 
present  one.    The  imiwrtance  of  this  fact  lies  in  this : 
the  condition  which  brings  with  it  a  low  rate  of  in- 
terest does  so  because  of  the  great  numlMT  of  men  who 
do  thus  value  a  future  standard  of  living  that  shall  be 
at  least  stationary  if  not  positively  rising.     The  grow- 
ing size  of  the  social  capital  iniplies  a  mure  general 
appreciation  of  the  importance  of  future  well-being. 
HecHUse  men's  ♦•roriomie  psychology  has  Ix-come  what 
it  is  and  lu'causc  it  is  still  changing  for  the  Ix'tter  then- 
is  a  second  reason  for  expecting  that  the  accumulation 


I. 


THE   LAW   OF  ACCUMULATION   OF  CAPITAL      353 

of  capital  will  not  hereafter  be  retarded.  We  make 
here  no  extravagant  claim  as  to  the  number  of  persons 
in  a  community  who  take  the  more  rational  views  as 
to  present  and  future.  The  number  of  each  class  is 
what  it  is;  but  facts  show  that  the  maintenance  of 
some  standard  is  the  most  efficient  motive  for  saving 
in  the  rase  of  each  one  ri  them,  and  that  low  interest 
tiicrcfore  calls  for  large  accumulations.  They  do 
show  that  the  number  who  take  the  more  rational 
views  is  a  growing  class,  that  they  accumulate  more 
than  other  classes,  and  that  every  addition  to  their 
relative  number  makes  for  more  rapid  accumulation 
within  the  society  of  which  they  are  mcnibers.  Two 
decisive  reasons,  then,  exist  for  thinking  that  the 
growth  of  capital  will  never  end  or  check  further 
growth.  There  are  still  further  facts,  however, 
which  have  a  bearing  on  this  problem. 

The  Importance  of  the  Character  of  the  Increases 
which  are  the  Largest  Sources  of  Accumulation.  —  If 
one  has  a  doubt  whether  the  large  sums  which  enter 
into  the  capital  which  is  steadily  accumulating  are 
saved  under  the  influence  of  a  desire  to  maintain  a 
standard,  this  doubt  will  be  removed  by  a  considera- 
tion of  the  source  from  which  great  accumulations 
come.  They  come  most  largely  from  the  net  profits 
of  the  entrepreneur.  Next  to  that  they  come  from 
the  earnings  of  what  must  be  classeil  as  labor,  though 
nuich  of  it  is  lal)or  of  a  special  and  very  superior 
sort.  The  salary  which  the  head  of  a  corporation 
receives,  the  fees  that  its  lawyers  get,  the  fees  that 
come  to  eminent  surgeons  or  engineers,  are  all  pay- 
ments for  labor;  and  these,  taken  together  with  the 
earnings  of  wcll-f)ai(l  artisans,  successful  fanners,  and 
very  many  others,  cuustitute  the  second  contribution 

2i. 


i                    •;. 

1 

i 

i 

in 
m 


J       m 


lit 


il: 


ll 


354 


«»SENTIAL8   or  ECONOMIC  THEORY 


to  accumulating  capital.    Savings  from  simple  inter- 
est itself  constitute  the  third  contribution.' 

Now,  of  these  sources  of  income,  net  profits  and  the 
wages  of  superior  labor  are  transient,  and  the  profits 
are  particular!}  so.    The  man  whose  mill  earns  fifty 
per  cent  in  a  particular  year  would  be  foolish  in  the 
last  degree  if  he  used  all  that  as  income.    That  would 
mean  brief  and  riotous  enjoyment,  followed  by  a  most 
painful  fall  from  the  standard  so  established.    He 
will  naturally  spend  some  part  of  the  phenomenal  divi- 
dend and  lay  aside  enough  of  it  to  afford  a  guarantee 
that  his  future  income  will  not  fall  below  the  present 
one.    The  man  who  during  the  best  years  of  his  work- 
ing life  enjoys  a  salary  or  professional  fees  amounting 
to  a  hundred  thousand  dollars  a  year  would  l)c  almost 
equally  foolish  if  he  were  to  spend  it  all  as  he  earns  it, 
leaving  his  family  unprovided  fur  and  his  own  later- 
years  exposed  to  the  pains  of  sharp  retrenchment. 
Transient  incomes  suggest  to  every  one  who  has  any 
degree  of  reason  the  need  of  establishing  and  main- 
taining some  future  standard  of   living,  and  of  in- 
vesting enough  to  accomplish  this.    This  is  more 
true,  of  course,  when  the  rate  of  interest  is  low. 

The  Importance  of  the  Need  of  Enlnrging  a  Business. 
—  There  is  a  special  reason  why  legitimate  business 
profits  are  morally  certain  to  be  to  a  large  extent  laid 
aside  for  uwestment.  The  man  would  say  that  he 
"needs  them  in  his  business."  They  come  at  a  time 
when  there  is  an  inducement  to  enlarge  the  scale  of 
his  profitable  operations.  The  man  who  is  getting  a 
dividend  of  fifty  per  cent  per  annum  must  make  hay 

'Gains  whioh  rnnio  from  linlrtinR  land  whioh  ri-oos  in  value 
in.)n>  rapidly  than  tho  intorcst  on  the  price  r.f  it  accumulates, 
is  to  be  rated  as  part  of  net  entrepreneur' »  profita. 


THE    LAW   OF   ACCUMULATION    OF   CAPITAL      355 


while  the  sun  shines,  and  he  can  do  it  by  doubling  the 
capacity  of  his  mill.  What  he  makes  and  what  he 
can  borrow  ho  uses  for  an  increase  of  his  output,  which 
it  is  important  to  secure  during  the  profitabh-  time. 
All  this  means  a  .juick  increase  of  the  total  capital  in 
existence. 

The  profits  of  a  monopoly  are  not  transient,  but 
are  likely  to  Ix'  both  long-continued  and  large,  and  it 
might  seem  that  they  would  constitute  a  larger 
source  of  addition  to  capital  than  those  profits  which 
come  from  technical  improvement.  There  are  several 
reasons  why  this  is  not  the  fact.  In  the  .'irst  place, 
what  we  are  di.scussing  is  the  addition  that  profits 
make  to  the  tutal  capital  of  society,  rather  than  to  the 
capital  of  any  one  person  or  corporation.  The  monop- 
oly makes  its  gains  by  taking  something  from  the 
pockets  of  the  general  public,  and  in  so  far  it  reduces 
the  power  of  the  general  public  to  save. 

It  might  \ic  allege! i,  however,  that  since  a  monopoly 
reduces  wages  and  interest,  adds  to  profits,  and  creates 
enormous  incomes  for  a  few  persons,  it  really  di- 
verts income  from  a  myriatl  of  persons  who  would 
save  very  little  of  it,  and  puts  it  into  the  |)ockets  of  a 
few  persons  who  are  likely  to  save  a  great  deal  of  it. 
This  might  conceivably  add  to  the  capital  of  society 
were  it  nctt  for  the  fact  that  the  more  secure  and  regular 
gains  (tf  monopolies  are  made  the  basis  of  large  capi- 
talization. A  company  that  earns  twenty-five  per 
cent  of  its  real  capital  per  annum  may  have  its  stock 
diluted  witlt  four  parts  of  water  and  pay  only  five 
per  cent  in  dividends  on  its  capitalization.  This  looks 
like  interest  anil  is  apt  to  l>e  treated  as  such  by  those 
who  receive  it.  It  is,  therefore,  not  a  more  favorable 
income  from  which  to  make  accumulations  of  capitnl 


M 


'^>M^'        f;^»A- 


MICROCOI>Y   RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


1.0 


1.25 


150 


1 2.8 

163 

r^  13.6 


IK 
U 


1 4.0 


2.5 
2.2 

2£ 
1.8 


^  APPLIED  IM/1GE     Inc 

^5-^  1653   Eost    Ma^n   Slr«l 

C\a  Rochester.   New   York        J  4609       USA 

'-as  (716)    482  -  0300  -  Phone 

^=  (716)   288  -  5989    -  (a. 


356 


ESSENTIALS   OF   ECONOMIC   THEORY 


m 


than  is  the  interest  on  real  capital.  The  sudden  gains 
which  promoters  and  manipulators  of  consolidated 
companies  make  are,  indeed,  transient  gains  and  may 
be  largely  added  to  capital.  The  introduction  of 
a  regime  of  monopoly  may  insure  a  period  of  much 
saving  by  the  class  that  profits  by  it;  but  the  later 
career  of  the  monopoly  is  unfavorable  to  the  growth 
of  capital. 

The  Special  Effect  of  a  Prospective  Fall  in  the  Rate 
of  Interest.  —  If  interest  which  continues  steadily 
at  a  low  rate  affords  an  especially  strong  incentive  for 
saving,  it  follows  that  a  falling  rate,  one  that  begins 
low  and  steadily  becomes  lower,  affords  a  still  stronger 
one.  The  average  rate  during  the  years  of  the  future 
for  which  a  prudent  man  makes  provision  is  made, 
of  course,  lower  than  it  would  be  if  the  rate  were  sta- 
tionary. This  influence  is  probably  not  as  effective 
as  it  would  be  if  the  remote  future  were  included  in 
the  view  of  those  who  are  securing  capital.  On  ac- 
count of  the  near-sightedness  to  which  attention  has 
been  called,  a  rate  of  interest  that  begins  at  four  per 
cent  and  falls  very  slowly  to  three  and  a  half  presents 
to  those  who  have  this  defective  vision  the  same  in- 
centive to  saving  as  one  that  begins  at  four  per  cent 
and  remains  steadily  at  that  figure.  What  is  true, 
however,  is  that  a  falling  rate  is  to  be  expected,  that 
this  fact  acts  as  a  stimulus  for  saving  in  the  case  of  the 
more  far-sighted  classes,  and  that  the  number  of  per- 
sons in  these  classes  is  increasing. 

In  so  far  as  the  increase  of  capital  is  concerned 
society  is  secure  against  the  danger  of  reaching  a  sta- 
tionary state.  Progress  in  wealth  will  not  build  a 
barrier  against  itself  by  stinting  the  resources  on 
which  hereafter  labor  must  rely.    When  we  exam- 


THE    LAW   OF   ACCUMULATION   OF   CAPITAL      357 

ine  the  sources  from  which  capital  mainly  comes,  we 
shall  further  test  the  probability  that  the  instrumen- 
talities which  add  productive  power  to  human  effort 
will  increase  through  the  longest  period  that  science 
needs  to  take  account  of.^ 

'  For  a  somewhat  similar  view  of  the  effect  of  a  fall  of  in- 
terest on  the  accumulation  of  capital,  see  Webb's  "  Industrial 
Democracy,"  Vol.  11,  pp.  610-632. 


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it 


CHAPTER  XXI 

CONDITIONS   INSURING    PROGRESS   IN   METHOD   AND 
ORGANIZATION 

The  PosfnMity  of  a  Law  of  Technical  Progress.  — 
It  might  seem  that  inventions  were  not  subject  to 
any  influence  that  can  be  described  under  the  heau 
of  a  law.  Genius  certainly  follows  its  own  devices, 
and  inventive  power  that  has  in  it  any  touch  of  genius 
may  be  supposed  to  do  the  same.  It  is,  however,  a 
fact  of  experience  that  some  circumstances  favor  and 
increase  the  actual  exercise  of  this  faculty,  while 
other  influences  deter  it.  Moreover,  what  is  im- 
portant  is  not  merely  the  making  of  inventions,  but 
the  introduction  of  such  of  them  as  are  valuable  into 
the  productive  operations  of  the  world.  Some  in- 
fluences favor  this  and  others  oppose  it,  and  it  is  en- 
tirely possible  to  recognize  the  conditions  in  which 
economies  of  production  rapidly  take  place  in  the 
actual  industry  of  different  countries. 

Technical  progress  has  been  particularly  rapid  in 
the  United  States,  though  in  this  respect  Germany 
has  in  recent  years  been  a  strong  rival,  and  ever  since 
the  introduction  of  steam  engines  and  textile  ma- 
chinery, England  has  continued  to  make  a  brilliant 
record.  France,  Belgium,  and  a  number  of  other 
countries  of  Europe  have  developed  an  industry  that 
is  in  a  high  degree  dynamic,  and  Japan  is  now  in  the 
lists  and  giving  promise  of  holding  her  own  against 
the  best  of  her  competitors.    The  question  arises 

368 


^^ywiisjpi^®'  ^f'^ 


m^^K!m?'r^'^^TW^r^s^^fF^B^^!^r^f?^'?¥wm^msm!msB^ 


i*'  ■  i 


LAW  OF  TECHNICAL  PROGRESS 


359 


,  -I 


whether  it  is  something  in  the  people,  or  something  in 
their  natural  and  commercial  environment,  which 
makes  differences  between  their  several  rates  of  prog- 
ress. 

Inventive  Abilities  widely  Diffused.  —  In  so  far  as 
originating  important  changes  is  concerned,  mental 
alertness  and  scientific  training  without  doubt  have  a 
large  effect.    Some  races  have  by  nature  more  of  the 
inventive  quality  than  others,  but  within  the  circle 
of  nations  that  we  include  in  our  purview  no  one  has 
any  approach  to  a  monopoly  of  this  quality.    Any 
people  that  can  make  discoveries  in  physical  science 
can  make  practical  inventions,  and  will  certainly  do 
so  if   they  are  under  a  large  incentive  to  do  it. 
Moreover,  alertness  in  discovering  and  duplicating 
the  inventions  of  others  is  as  important  in  actual 
business  as  originating  new  devices.    At  present  it  is 
a  known  fact  that  the  Germans  not  only  invent 
machinery,  but  quickly  learn  to  make  and  to  use 
machinery  that  originates    elsewhere    and    demon- 
strates its  value  in  reducing  the  cost  of  the  produc- 
tion;   and    the    remote    Japanese    have   not   only 
surpassed  all  others  in  the  quick  adoption  of  eco- 
nomic  methods   that  have   originated   in  Western 
countries,  but  have  put  their  own  touch  upon  them 
and   revealed  the  existence  of  an  inventive  faculty 
that  is  likely  to  make  them  worthy  rivals  of  Occi- 
dental races. 

The  Importance  of  Inducements  to  make  and  use 
Inventions.  —  Granted  a  wide  diffusion  of  inventive 
ability,  the  actual  amo"nt  of  really  useful  inventing 
that  is  done  must  donend  on  the  inducement  that  is 
offered.  Will  an  economical  device  bring  an  ade- 
quate return  to  the  man  who  discovers  it  and  to  the 


f '  5 ; 

if 
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I    1   ■!■ 


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1  I       .- 

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ESSENTIALS    OF   ECONOMIC   THEORY 


3 


man  who  introduces  it  into  productive  operations? 
If  it  will,  we  may  expect  that  a  brilliant  succession  of 
such  devices  will  come  into  use,  and  that  the  power 
of  mankind  to  bend  the  elements  of  nature  to  its 
service  will  rapidly  increase. 

The  Usefulness  of  a  Tempoi-ary  Monopoly  of  a  New 
Device  for  Production.  —  If  an  invention  became  public 
property  the  moment  that  it  was  made,  there  would 
be  small  profit  accruing  to  any  one  from  the  use  of  it 
and  smaller  ones  from  making  it.    Why  should  one 
entrepreneur  incur  the  cost  and  the  risk  of  experi- 
menting with  a  new  machine  if  another  can  look  on, 
ascertain  whether  the  device  works  well  or  not,  and 
duplicate  it  if  it  is  successful?    Under  such  condi- 
tions the  man  who  watches  others,  avoids  their  losses, 
and  shares  their  gains  is  the  one  who  makes  money ; 
and  the  system  which  gave  a  man  no  control  over  the 
use  of  his  inventions  would  result  in  a  rivalry  in 
waiting  for  others  rather  than  an  effort  to  distance 
others  in  originating  improvements.    This  fact  affords 
a  justification  for  one  variety  of  monopoly.    The 
inventor  in  any  civilized  state  is  given  an  exclusive 
right  to  make  and  sell  an  economical  appliance  for  a 
term  of  years  that  is  long  enough  to  pay  him  for 
perfecting  it  and  to  pay  others  for  introducing  it. 
Patents  stimulate  improvement,  and  the  general  prac- 
tice of  the  nations  indicates  their  recognition  of  this 
fact.    They  all  give  to  the  inventor  a  temporary  mo- 
nopoly of  the  new  appliance  he  devises,   but  this 
monopoly  differs  from  others  in  this  essential  fact: 
the  man  is  allowed  to  have  an  exclusive  control  of 
something  which  otherwise  might  not  and  often  would 
not  have  come  into  existence  at  all.     If  it  would  not, 
—  if  the  patented  article  is  something  which  society 


'-^^s^' 


<:^  cj'^i~;?;^^v  x&^;-':-5&te*r#^ 


-«):7-H 


LAW  OF  TECHNICAL  PROGRESS 


361 


without  a  patent  system  would  not  have  secured  at 
all,  —  the  inventor's  monopoly  hurts  nobody.  It  is 
as  though  in  some  magical  way  he  had  caused  springs 
of  water  to  flow  in  the  desert  or  loam  to  cover  barren 
mountains  or  fertile  islands  to  rise  from  the  bottom 
of  the  sea.  His  gains  consist  in  something  which  no 
one  ises,  even  while  he  enjoys  them,  and  at  the  ex- 
piration of  his  patent  they  are  diffused  freely  through- 
out society. 

Possible  Abmes  of  the  Patent  System.  —  It  is  of 
course  true  that  a  patent  may  often  be  granted  for 
something  that  would  have  been  invented  in  any 
case,  and  patents  which  are  granted  are  sometimes 
made  too  broad,  and  so  cover  a  large  number  of  ap- 
pliances for  accomplishing  the  same  thing.  In  these 
cases  the  public  is  somewhat  the  loser;  but  for  the 
reasons  about  to  be  given  this  loss  is  far  more  than 
offset  by  the  gain  which  the  system  of  patents  brings 
with  it. 

The  gains  of  the  inventor  cannot  extend  much 
beyond  the  period  covered  by  his  patent,  unless  some 
further  and  less  legitimate  monopoly  arises.  If  the 
use  of  an  important  machine  builds  up  a  great  corpora- 
tion which  afterward,  by  virtue  of  its  size,  is  able  to 
club  off  competitors  that  would  like  to  enter  its  field, 
the  public  pays  more  than  it  should  for  what  it  gets ; 
and  yet  even  in  these  cases  it  almost  never  pays  more 
than  it  gets.  The  benefit  it  derives  is  simply  less 
cheap  than  it  ought  to  be.  Much  of  the  power  of  the 
telephone  monopoly  has  been  extended  beyond  the 
duration  of  its  most  important  patent,  and  that 
patent  was  in  its  day  broader  than  it  should  havp  been ; 
and  yet  there  never  was  a  time  when  the  use  of  the 
telephone  in  facilitating  business,  and  in  saving  time 


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362 


ESSENTIALS  OF  ECONOMIC  THEORY 


I      '-i 


4 


and  trouble  in  a  myriad  of  ways,  did  not  far  outweigh 
the  total  cost  which  the  users  of  telephones  incurred 
As  we  shall  soon  see,  important  inventions  invariably 
confer  some  benefit  on  the  public  at  the  start.  The 
owner  of  the  new  device  must  find  a  market  for  his 
products,  and  must  offer  them  on  terms  which  wiU 
make  it  for  the  interest  of  the  public  to  use  them 
largely. 

TJve  Effect  of  Competition  in  Causing  Improvements 
to  Multiply.  —  Competition  insures  a  large  number 
of  mventors  and  offers  to  each  of  them  a  large  induce- 
ment to  use  his  gifts  and  opportunities.    A  great  cor- 
poration may  employ  salaried  inventors  and,  because 
of  Its  great  capital  and  large  income,  it  may  ex- 
periment with  inventions  with  far  less  risk  to  itself 
than  an  inventor  usually  takes.    Wh6n  large  cor- 
porations compete  actively  with  one  another,  the  em- 
ployment of  salaried  inventors  is  very  profitable  to 
them;  and  improvements  in  production  go  on  more 
rapidly  than  they  are  likely  to  do  after  these  firms 
consolidate  with  each  other  and  cease  to  feel  the 
spur  which  the  danger  of  being  distanced  in  a  race 
affords.    It  is  a  fact  of  observation,  and  not  merely 
an  inference,  that  monopolies  are  not  as  enterprising 
as  competing  companies. 

Effects  of  Monopoly  on  the  Spirit  of  Enterprise  — 
In  monopolies,  theoretically,  there  is  the  same  induce- 
ment to  adopt  inventions  as  in  the  case  of  competing 
firms,  excepting  always  the  motive  of  self-preser- 
vation. The  monopoly  can  make  money  by  improve- 
ments as  competing  firms  would  do.  A  perfectly  in- 
telligent monopoly,  with  disinterested  management, 
would  adopt  an  improvement  offered  to  it  as  promptly 
as  any  competing  firm,  if  the  sole  motive  were  profit. 


i-i'^t-jsffit-'^T^U's 


r/AJi<.*i&:(ri«..<-jJW;g(^ 


LAW  OF  TECHNICAL  PROGRESS 


363 


There  is  no  reason  why  an  intelligent  monopoly  should 
hold  on  to  antiquated  machinery,  when  modern  ma- 
chinery would  enable  it  to  stand  the  cost  of  intro- 
duction and  make  a  net  improvement  besides.    A 
competing  producer  gains  an  advantage  over  his  rivals 
by  discarding  old  machinery  and  adopting  new  at 
exactly  the  right  time,  neither  too  late  nor  too  early. 
The  true  point  of  abandonment  of  the  old  machine,  as 
we  have  already  seen,  is  reached  when  the  labor  and 
capital  that  now  work  in  connection  with  it  can  make 
a  shade  more  by  casting  it  off  and  making  a  combina- 
tion of  a  better  kind;  and  this  rule  applies  to  monop- 
olies as  well  as  to  competitors.    At  just  the  point 
where  a  competitor  can  gain  an  advantage  over  rivals 
by  modernizing  his  appliances,  the  monopoly  can 
make  money  by  doing  so. 

An  important  fact  is  that  the  monopoly  has  as  a 
motive  the  making  of  profits  for  its  stockholders. 
Not  only  is  that  a  less  powerful  motive  than  self- 
preservation,  but  it  appeals  largely  to  persons  who 
are  not  themselves  in  control  of  the  business.    Ab- 
sentee ownership  is  the  chief  disability  of  the  monop- 
oly.   Managers  may  have  other  interests  than  those  of 
large  dividend  making,  and  in  such  cases  a  monopoly 
is  apt  to  wait  too  long  before  changing  its  appliances. 
It  needs  to  be  in  no  hurry  to  buy  a  new  invention,  and 
it  can  make  delay  and  tire  out  a  patentee,  in  order 
to  make  good  terms  with  him;    and  this  practice 
affords  little  encouragement  to  the  independent  in- 
ventor.    On   the    whole,    a   genuine    and    perfectly 
secure  monopoly  would  mean  a  certain  degree  of 
stagflation  where  progfpw  until  now  ha-?  been  rapid. 

Why  the  Public  depends  on  Competition  for  Securing 
its  Share  of  Benefit  from   Improvements.  —  Anoiher 


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364 


EaSENTIALS   OF   ECONOMIC  THEORY 


<'.i 


question  is  whether  the  two  systems,  that  of  com- 
petition, on  the  one  hand,  and  monopoly,  on  the  other, 
confer  equal  benefits  on  the  public  by  virtue  of  the 
improvements   they   make.    Competition   does  this 
with  the  greatest   rapidity.    As   we  have  seen,   it 
transforms  the  net  profits  due  to  economies  into  in- 
crements of  gain  for  capitalists  and  laborers  through- 
out all  society.    The  wages  of  to-day  are  chiefly  the 
transformed  profits  of  yesterday  and  of  an  indefinite 
series  of  earlier  yesterdays.    The  man  who  is  now 
making  the  profits  is  increasing  his  output,  supplant- 
ing less  efl^cient  rivals,  and  giving  consumers  the  ben- 
efit of  his  newly  attained  eljiciency  in  the  shape  of 
lower  prices  of  goods.     In  practice  rivals  take  turns 
in  leading  the  procession;    now  one  has  the  most 
economical  method,  now  another,  and  again  another; 
and   the  great  residual   claimant,  the   public,  very 
shortly  gathers  all  gains  into  its   capacious  pouch 
and  keeps  them  forever. 

Would  a  secure  monopoly  do  something  like  this  ? 
Far  from  it.  It  would  be  governed  at  every  step  by 
the  rule  of  maximum  net  profits  for  itself.  Its  output 
would  not  be  carried  beyond  the  point  at  which  the 
fall  in  price  begins  really  to  be  costly.  The  lowering 
of  the  price  enlarges  the  market  for  the  monopoly's 
product  and  up  to  a  certain  point  increases  its  net 
gains.     Beyond  that  point  it  lessens  them. 

Now,  even  the  interest  of  the  monopoly  itself  would 
lead  i-  to  give  the  public  some  benefit  from  every  econ- 
omy that  it  makes.  This  is  because  the  amount  of 
output  that  will  yield  a  maximum  of  profit  at  a  cer- 
tain cost  of  prodaction  is  not  the  sanip  that  will  yield 
the  maximum  of  net  profit  when  the  cost  is  lower. 
Every  fall  in  cost  makes  it  for  the  interest  of  the 


•  -«A- 


LAW  OF  TECHNICAL  PROGRESS 


365 


monopoly  to  enlarge  its  output  somewhat,  but  by 
no  means  as  much  as  competing  producers  would  en- 
large theirs.     It  will  always  hold  the  price  well  above 
the  level  of  cost. 
In   the  accompany- 
ing  figure    distance 
along  the   line  AK 
represents  the 
amount  of  goods 
produced,  while  ver- 
tical distance  above 
the  line  measures 
costs  of  production, 
as    well    as    selling 
prices,  and  the   de- 
scending curve  FJ  represents  the  fall  of  prices  which 
takes  place  as  the  outi)Ut  of  the  goods  is  increased. 
Now,  when  the  cost  of  production  stands  at  the  level 
of  the  line  CI,  the  amount  of  output  that  will  yield  the 
largest  amount  of  net  profit  is  the  amount  represented 
by  the  length  of  the  line  AM.    That  amount  of  prod- 
uct can  be  sold  at  the  price  represented  by  the  line 
MG,    The   gross   return   from  the  sale  will   be  ex- 
pressed by  the  area  of  the  rectangle  AEGM,  and  the 
area  CEGN,  which  falls  above  the  line  of  cost,  CI,  is 
net  profits.     They  are  larger  than  they  would  be  if 
the  line  MG  were  moved  either  to  the  right  or  to  the 
left,  i.e.,  if  the  amount   of   production  were  made 
either  larger  or  smaller.     Now,  if  the  cost  of  produc- 
tion falls  to  the  level  of  the  line  BJ,  it  will  be  best  to 
increase  the  output  from  AM  to  AL.    The  whole 
return  will   then   be   represented    by   the  rectangle 
ADHL,  and  the  area  BDHU  represents  profits,  with 
the  cost  at  the  new  and  lower  level.    These  are  some- 


ill 


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yrn-  •':**.-i'V- . 


X^i^iP^'^*/M^f^^^J: 


366 


J 


I  i 


ESSENriALS   OF   ECONOMIC  THEORY 


what  larger  than  they  would  be  if  the  output  con- 
tinued to   be  only  the   amount  AM.    Under  free 
competition  the  price  would  fall  to  the  line  BJ,  the 
net   profits  would   disappear,  and  the  public  would 
have  the  full  benefit  of  the  improvement  in  production. 
The  Purpose  of  the  System  of  Patents.  —  Patents 
are  a  legal  device  for  promoting  improvements,  and 
they  accomplish  this  by  invoking  the  principle  of 
monopoly  which  in  itself  is  hostile  to  improvement. 
They  do  not  as  a  rule  create  the  exclusive  privilege 
of  producing  a  kind  of  consumers'  goods,  but  they 
give  to  their  holders  exclusive  use  of  some  instru- 
mentality or  some  process  of  making  them.    The  pat- 
entee is  not  the  only  one  who  can  reach  a  goal,— the 
production  of  a  certain  article,  — but  he  is  the  only 
one  who  can  re-  ch  it  by  a  particular  path.    A  patented 
machine  for  welting  shoes  stops  no  one  from  making 
shoes,  but  it  forces  every  one  who  would  make  them, 
except  the  patentee  or  his  assigns,  to  resort  to  a  less 
economical  process. 

Patents  Limited  in  Duration  indispensable  as 
Dynamic  Age7its.  —  U  an  inventor  had  no  such 
protection,  the  advantage  he  could  derive  would  be 
practically  nil,  and  there  would  be  no  incentive  what- 
ever for  making  ventures  except  the  pleasure  of 
achievement  or  the  honor  that  might  accrue  from  it. 
In  the  case  of  poor  inventors  this  would  be  cold  com- 
fort ir.  view  of  the  time  and  outlay  which  most  inven- 
tions ipquire.  Not  only  on  a  priori  grounds,  but  on 
grounds  of  actual  experience  and  universal  practice, 
we  may  say  that  patents  are  an  indispensable  part  of 
a  dynamic  system  of  industry.  It  is  also  important 
that  the  monopoly  of  method  which  the  patent  gives 
should  be  of  limited  duration.     If  the  method  is  a 


=-<*'  ."=■; V-W«f- , 5- >;--f ^■*>' S-:e^-'.  as'' •«■  •£ '■'■ ' , 


-.  s-^-.v 


LAW   OF  TECHNICAL  PROGRESS 


367 


good  one  and  the  profit  from  using  it  is  large,  the 
seventeen  years  during  which  in  our  own  country  a 
patent  may  run  affords,  not  only  an  adeijuato  reward 
for  the  inventor,  but  an  incentive  to  a  myriad  of  other 
inventors  to  enmlale  him  and  try  to  duplicate  hia 
success.     Ingenious  brains,  which  are  everywhere  at 
work,   usually   prevent  the  owners  of  a  particular 
patent   from  keeping  any  decisive  advantage  over 
competitors  during  the  whole  period  of  seventeen 
years.     Long  before  the  expiration  of  that  time  some 
device  of  a  different  sort  may  enable  a  rival  to  create 
the  same  product  with  more  than  equal  economy,  and 
the  leadership  in  production  then  passes  to  this  rival, 
to  remain  with  him  till  a  still  further  device  effects  a 
still  larger  economy  and  carries  the  leadership  else- 
where.   That   alternation   in    leadership   which    -vc 
have  described  and  illustrated  takes  place  largely  in 
consequence  of  our  system  of  patents ;  and  yet  every 
particular  patent  affords  a  quasi-monopoly   to  its 
holder.     The  endless  succession  of  them  insures  a  wide 
diffusion  of  advantages.    At  the  expiration  of  each 
patent,  even  if  it  has  not  been  supplanted  by  a  later 
and  more  valuable  one,  the  public  gets  the  benefit 
of  the  full  economy  it  insures,  and  wherever  an  unex- 
pired patent  is  supplanted  by  a  new  one,  the  public 
gets  this  benefit  much  earlier.    Cost  of  production 
tends  rapidly  downward,  and  the  public  is  the  per- 
manent beneficiary. 

Patents  as  a  Means  of  Curtailing  MonnpoUes.— 
While  a  patent  may  sometimes  sustain  a  powerful 
monr>poly  it  may  als-^  afford  the  best  means  of  break- 
ing one  up.  Often  have  small  producers,  by  the  use 
of  patented  machinery,  trenched  steadily  on  the  bu-i- 
ness  of  great  combinations,  till  they  themselves  be- 


i,l 


11 


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U'i 


a 


368 


ESSENTIALS   OP  ECONOMIC  THEORY 


came  great  producers,  secure  m  the  possession  of  a 
large  field  and  abundant  profit.    Moreover,  in  the 
case  of  a  patent  which  builds  up  a  monopoly  and 
continues  for  the  full  seventeen  years  of  its  duration 
unsupplanted  by  any  rival  device,  the  public  is  likely 
to  get  more  benefit  than  the  patentee,  or  even  the 
company  which  uses  his  invention.    In  widening  the 
market  for  its  product  the  company  must  constantly 
cater  to  new  circles  of  marginal  consumers,  and  must 
give  to  all  but  the  marginal  ones  an  increasing  benefit 
that  is  in  excess  of  what  it  costs  them.     Probably 
few  patents  have  been  issued  in  America  which  illus- 
trate the    mfavorable  features  of  the  system  more 
completely   than   did   the    Bell    telephone   patent, 
which  gave  to  a  single  couipany  during  a  long  period 
a  monopoly  of  the  telephone  business ;  and  yet  there 
nre  few  men  of  affairs  v;ho  do  not  perceive  that,  m 
the  saving  of  time  which  the  telephone  effected  and  in 
the  acceleration  of  business  which  it  caused,  they 
gained  from  the  outset  more  than  they  lost  in  the 
shape  of  high  fees.    Something  of  the  same  kind  is 
true  of  the  users  of  domestic  telephones;   for  though 
they  may  cost  more  than  they  should,  they  do  their 
share  toward  placing  those  who  use  them  on  a  higher 
level  of  comfort. 

The  Law  of  Sunnval  of  Efficient  Organization.  —  In 
broad  outlines  we  have  depicted  the  conditions  which 
favor  technical  progress.  There  is  a  law  of  sur- 
vival which,  when  competition  rules,  eliminates  poor 
methods  and  introduces  better  ones  in  endless  suc- 
cession. Under  a  regime  of  secure  monopoly  this 
law  of  survival  scarcely  operates,  though  desire  for 
gain  causes  a  progress  which  is  less  rapid  and  sure. 
The  same  may  be  said  of  changes  in  organization,  in 


LAW  OF  TECHNICAL  PROGRESS 


369 


so  far  a?  that  means  a  coordinating  of  the  hibor  and  the 
capital  within  an  estabhshment.  When  the  manager 
of  a  mill  so  marshals  his  forces  as  to  get  a  much  larger 
product  per  man  and  per  dollar  of  invested  capital  than 
a  rival  can  do,  he  has  that  rival  at  his  mercy  and  can 
absorb  his  business  and  drive  him  from  the  field.  In 
ortler  to  survive,  any  producer  must  keep  pace  with 
the  aggressive  and  growing  ones  among  his  rivals  in 
the  march  of  improvement,  whether  it  comes  by  im- 
proved tools  of  trade  or  improved  generalship  hi  the 
hanilling  of  men  and  tools.  Quite  as  remorseless 
as  the  law  of  survival  of  good  technical  methods  is 
the  law  of  survival  of  efficient  organization,  and  so 
long  as  the  organization  is  limited  to  the  forces  under 
the  control  of  single  and  competing  entrepreneurs, 
what  we  have  said  about  the  advance  in  methods 
applies  to  it.  It  is  a  beneficent  process  for  society, 
though  its  future  scope  is  more  restricted  than  is  that 
of  technical  improvement,  since  the  marshaling  of 
forces  in  an  establishment  may  be  carried  so  near  to 
perfection  that  there  is  a  limit  on  further  gains. 
Moreover  organization,  in  the  end,  ceases  to  confine 
itself  to  the  working  forces  of  single  entrepreneurs, 
but  often  continues  till  it  brings  rival  producers  into 
a  union. 

The  Extension  of  Organization  to  Entire  Sub- 
groups. —  Both  of  these  modes  of  progress  cause 
establishments  to  grow  larger,  and  the  ultimate  effect 
of  this  is  to  give  over  the  market  for  goods  of  any  one 
kind  to  a  few  establishments  which  are  enormously 
large  and  on  something  like  a  uniform  plane  of 
(>(ficioncy.  Then  the  organizing  tendency  takes  a 
baleful  cast  as  the  creator  of  "trusts"  and  the  extin- 
guisher   of    rivalries    that    have    insured    progress. 


ab 


till' 


'2  b 


iiii 


370 


ESSENTIALS   OP   ECONOMIC  THEORY 


^^'hen  p/ionster-like  corporations  once  start  a  com- 
petitive strife  with  each  other,  it  is  very  fierce  and 
very  costly  for  themselves;  and  this  affords  an  in- 
ducement for  taking  that  final  step  in  organization 
which  brings  competition  to  an  end.    That  is  or- 
ganization of  a  different  kind,  and  the  effects  of  it  are 
very  unlike  those  of  the  coordinating  process  which 
goes  on  within  the  several  establishments.     In  this, 
Its  final  stage,  the  organizing  tendency  brings  a  whole 
subgroup  into  union,  and  undoes  much  of  the  good 
it  accomplished  in  its  earlier  stage,  when  it  was  per- 
fecting the  individual  establishments  within  the  sub- 
group.    While  the  earlier  process  makes  the  supply 
of  goods  of  a  certain  kind  larger  and  cheaper,  the  final 
one  makes  it  smaller  and  dearer;  and  while  the  earlier 
process  scatter  benefits  among  consumers,  the  final 
one  imposes  a  ta.x  on  consumers  in  the  shape  of  higher 
prices    for    merchandise.     Yet    the    union    that    is 
formed  between  the  shops  is,  in  a  way,  the  natural 
sequel  to  the  preliminary  organization  which  took 
place  within  them  and  helped  to  make  them  few  and 
large.    Trusts  are  a  product  of  economic  dynamics, 
and  we  shall  study  them  in  due  time.    The  organiza- 
tion we  have  here  in  view  is  the  earlier  one  which 
takes  place  within  the  several  establishments.    It 
obeys  a  law  of  survival  in  which  competition  is  the 
impelling  force,  though  it  leads  to  a  condition  in 
which  an  effort  is  made  to  bring  competition  to  an 
ond.     This   earlier  organization  is   most   beneficent 
in  Its  general  and  permanent  effects;  and  what  has 
been  said  of  the  results  of  progress  in  the  technique 
of  production  :  ^y,  with  a  change  of  terms,  be  said 
a-am  of  progross  in  the  art  of  enordinating  the  agents 
employed.    It  is  a  source  of  temporary  gain   for 


J' 


LAW  OF  TECHNICAL  PROGRESS 


371 


entrepreneurs  and  of  permanent  gains  for  laborers  and 
capitali.st.s.  It  a.M.H  to  the  grand  total  of  the  social 
product  and  leaves  this  to  l,e  distributed  in  accord- 
ance with  the  piinfiF)le  which,  in  the  absence  of  un- 
toward influences,  would  treat  the  producers  fairly  — 
that  which  tends  to  give  to  each  producer  a  share 
more  or  less  (([uivalent  to  his  contribution.  In  its 
nature  and  in  its  results  it  is  the  opposite  of  that  other 
type  of  organization  which  seeks  to  bring  competitive 
rivalry  to  an  end,  and  in  so  far  as  it  succeeds  divorces 
men's  contributions  to  the  social  product  f.-om  the 
shares  that  they  draw  from  it. 


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ll 


CHAPTER  XXII 

INFLUENCES  WHICH  PERVERT  THE  FORCES  OF  PROGRESS 

Thus  far  we  have  been  dealing  with  what  we 
have  called  natural  forces.    The  phenomena  which 
we  have  studied  have  not  been  caused  by  any  con- 
scious and  purposeful  action  of  the  people  as  a  whole. 
They  have  not  been  brought  about  by  the  power 
of  governments  nor  by  anything  which  savors  of 
what  is  called  collectivism.    Individ' lals  have  done 
what  they  would,  seeking  to  promote  their  own  in- 
terests under  conditions  of  great  freedom,  and  the 
f  -feet  has  been  a  system  of  social  industry  which 
IS    highly    productive,    progressive,   and    generally 
honest.    Production   has   constantly  increased,  and 
the  product   has  been  shared  under  the  influence 
of  a  law  which,  if  freedom   were   quite  complete 
and  competition  perfect,  would  give  to  each  producer 
what  he  contributes  to  the  aggregate  output  of  the 
great    social    workshop.     We    have    claimed    that, 
m  the  world  as  it  is,  influenced  by  a  great  number 
of  disturbing  forces,   these   fundamental  laws  still 
act  and  tend  t-  bring  about  the  condition  of  pro- 
ductiveness, ^      -    ss,  and    honesty  which  is   their 
natural  result,     if  the  actual  condition  falls  short  of 
this,  the  fact  is  mainly  due  to  curtailments  ^f  free- 
dom and  interferences  with  the  competition  w.  ich  is 
the  result  of  freedom. 

Injluencea    which     retard    Static    Adjustments.— 
Throughout  the  study  we  have  paid  due  attention 

372 


EVIL   EFFECTS  OF  MONOPOLY 


373 


to  those  ordinary  elements  of  "economic  friction" 
which  all  theoretical  writers  have  recognized  and 
which  practical  writers  have  put  quite  in  the  fore- 
ground;   and  we  have  discovered  that,  while  they 
are  influences  to  be  taken  account  of  in  any  state- 
ment of  principles,  they  in  no  wise  invalidate  prin- 
ciples   themselves.     For   the    most    part   they    are 
influences    which    retard    those    movements    which 
bring  about  static  adjustments.    An  invention  cheap- 
ens the  production  of  some  article  and  at  once  the 
natural  or  static  standard  of  its  price  falls;    but 
the  actual  price  goes  down  more  slow'y,  and  in  the 
interim  the  producer  who  has  the  efficient  method 
gathers  in  the  fruit  of  it  as  a  profit.    The  retarding 
influence  is  a  fact  that  should  be  as  fully  recognized 
in  a  statement  of  the  law  of  profit  as  any  other.    The 
existence  of  it  is  an  element  in  the  theory  of  entre- 
preneur's profit.      Improvements  which  reduce   the 
cost  of  goods  enhance  the  product  of  labor,  and  this 
sets  a  higher  standard  for  wages  than  the  one  that 
has  thus  far  ruled;    but  a  delay  occurs  before  the 
pay  of  workmen  rises  to  the  new  standard.     Ad- 
justments  have   to   be   made   which   require   time, 
and  these  are  as  obviously  elements  that  must  be 
incorporated  into  an  economic  theory  as  any  with 
which  it  has  to  deal. 

Influences  which  resist  Dynamic  Movements.  — 
If  there  is  anything  which,  without  impairing  the 
motive  powers  of  economic  progress,  puts  an  ob- 
stacle in  the  way  of  the  movement,  it  has  to  be  treated 
like  one  of  these  elements  of  friction  to  which  we 
have  just  referred.  In  our  discussion  of  the  growth 
of  population,  the  increase  of  wealth,  the  improve- 
ment of  method,  etc.,  we  have  paid  attention  to 


:|1| 


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I  ■  I 


r, 


■I 


374 


ESSENTIALS   OF   ECONOMIC   THEORY 


resisting  forces  as  well  as  others,  and  have  tried  to 
determine  what  is  the  resultant  of  all  of  them.  The 
forces  of  resistance  have  their  place  in  a  statement 
of  dynamic  laws. 

An  Influence  that  perverts  the  Forces  of  Progress. 
—  We  have  to  deal,  not  only  with  such  retarding 
mfluences,  but  with   a   positive   perversion   of  the 
force    that    makes    for    progress.    Everywhere    we 
have    perceived    that    competition  —  the    healthful 
rivalry  in  serving  the  public  —  is  essential  in  order 
that  the  best  methods  and  the  most  effective  or- 
ganization   should    be   selected    for   survival,   and 
that  industry  should  show  a  perpetual  increase  in 
productive  power.    In  our  study  of  the  question 
whether  improved  method  and  improved  organiza- 
tion tend  to  promote  or  to  check  further  improve- 
ment, we  have  found  that  these  beneficent  changes 
are  naturally  self-perpetuating,  so  long  as  the  uni- 
versal  spring  of   progress,    competition,    continues. 
A  proviso  has  perforce  been  inserted  into  our  op- 
timistic forecast  as  to  the  economic  future  of  the 
world  —  if  nothing  suppresses  competition,  progress 
will  continue  forever. 

Monopoly  and  Economic  Progress.— The  very 
antithesis  of  competition  is  monopoly,  and  it  is  this 
which,  accc  ,'ding  to  the  common  view,  has  already 
seated  itself  in  the  places  of  greatest  economic  power. 
"Competition  is  excellent,  but  dead,"  said  a  so- 
cialist in  a  recent  discussion;  and  the  statement 
expresses  what  many  believe.  There  is  in  many 
quarters  an  impression  that  monopoly  will  dominate 
the  economic  life  of  the  twentieth  century  as  com- 
petition has  dominated  that  of  the  nineteenth.  If 
the  impression  is  true,  farewell  to  the  progress  which 


li 


EVIL  EFFECTS    OF  MONOPOLY 


375 


in  the  past  century  has  been  so  rapid  and  inspiring. 
The  dazzUng  visions  of  the  future  which  technical 
gains  have  excited  must  be  changed  to  an  anticipa- 
tion as  dismal  as  anything  ever  suggested  by  the 
Political  Economy  of  the  classical  days  — that  of 
a  power  of  repression  checking  the  upward  move- 
ment of  humanity  and  in  the  end  forcing  it  down- 
ward.   No    description    could    exaggerate    the    evil 
which  is  in  store  for  a  society  given  hopelessly  over 
to  a  regime  of  private  monopoly.    Under  this  com- 
prehensive name  we  shall  group  the  most  important 
of  the  agencies  which  not  merely  resist,  but  posi- 
tively vitiate,  the  action  of   natural  economic  law. 
Monopoly  checks  progress  in  production  and  infuses 
into  distribution  an  element  of  robbery.     It    per- 
verts the  forces  which  tend  to  secure  to  individuals 
all  that  they  produce.    It  makes  prices  and  wages 
abnormal  and  distorts  the  form  ot  the  industrial 
mechanism.    In   the   study   of   this   perverting   in- 
fluence we  shall  include  an  inquiry  as  to  the  means 
of  removing  it  and  restoring  industry  to  its  normal 
condition.    We  shall  find  tliat  this  can  be  done  — 
that  competition  can  be  liberated,  though  the  libera- 
tion can  be  accomplished  only  by  difficult  action  on 
the  part  of  the  state. 

Tfie  comparatively  Narrow  Field  of  Present  Action 
hy  the  State.  —  Economic  theory  has  always  recog- 
nized the  existence  and  the  restraining  action  of 
the  civil  law,  which  has  prohibited  many  things 
which  the  selfishneps  of  individuals  would  have 
prompted  them  to  do.  Certain  officers  of  the  .state 
pnnstitute,  .as  we  saw  in  an  early  chapter,  one  generic 
class  of  laborers,  one  of  whose  functions  it  is  t.. 
retain  in  a  state  of  appropriation  things  on  whi<:h 


r  :    1 


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376 


ESSENTIALS    OF   ECONOMIC   THEORY 


■  ..»,t 


i. 


other  men  have  conferred  utility  —  that  is,  to  pro- 
tect property,  and  so  to  cooperate  in  the  creation 
of  wealth.     In  a  few  directions  they  render  services 
which   private   employers   might   render   in   a   less 
effective  way.    The  state,  through  its  special  servants, 
educates    children    and    youth,    guards    the    public 
health,    encourages    inventions,    stimulates    ceitain 
kinds  of  production,  collects  statistics,  carries  letters 
and    parcels,    provides    currency,    improves    rivers 
and  harbors,  preserves  forests,  constructs  reservoirs 
for  irrigation,  and  digs  canals  and  tunnels  for  trans- 
portation.    In  these  ways  and  in  others  it  enters 
the  field  of  positive  production;    but  in  the  main 
it  leaves  that  field  to  be  occupied  by  private  em- 
ployers of  labor  and  capital     Business  is  still  in- 
dividualistic,   since   those    who   initiate    enterprises 
and  control  them  are  either  natural  persons  or  those 
artificial  and  legal  persons,  the  corporations. 

The  Growing  Field  of  Adim  by  Corporations.  — 
Until  recently  there  has  been  comparatively  little 
production  in  the  hands  of  corporations  great  enough 
to  be  exempt  from  the  same  economic  laws  which 
apply  to  a  blacksmith,  a  carpenter,  or  a  tailor.     In- 
dividual enterprise  and  generally  free  competition 
have  prevailed.    The  state  has  not  checked  them 
and  the  great  aggregations  of  capital  to  which  we 
give  the  name  "trusts"  have  not,  in   this  earlier 
period,  been  present  in  force  enough  to  check  them. 
The    field    for    business    enterprise    has    been   open 
to  individuals,  partnerships,  and  corporations;   they 
have  entered  it  fearlessly,  and  a  free-for-all  com- 
petition has  resulted.    This  free  action  is  in  process 
of  being  repressed  by  chartered  bodies  of  capitalists, 
the  great  corporations,  whom  the  law  still  treats 


)ji»' 


EVIL  EFFECTS  OF  MONOPOLY  377 

somewhat  as  though  in  its  collective  entirety  each 
one  were  an  individual.  They  are  building  up  a 
semi-public  power  —  a  quasi-state  within  the  general 
state  —  and  besides  vitiating  the  action  of  economic 
laws,  are  perverting  governments.  They  trench 
on  the  freedom  on  which  economic  laws  are  postu- 
lated and  on  civic  freedom  also. 

How  Corporaiions  pervert  the  Action  of  Economic 
Laws.  — Whatever  interferes  with  individual  enter- 
prise interferes  with  the  action  of  the  laws  of  value, 
wages,  and  interest,  and  distorts  the  very  structure 
of  society.     Prices  do  not  conform  to  the  standards 
of  cost,  wages  do  not  conform  to  the  standard  of 
final  productivity  of  labor,  and  interest  does  not 
conform  to  the  marginal  product  of  capital.    The 
system  of  industrial  groups  and  subgroups  is  thrown 
out  of  balance  by  putting  too  much  labor  and  capital 
at  certain  points  and  too  little  at  others.    Profits 
become,  not  altogether  a  temporary  premium  for 
improvement,  —  the  reward  for  giving  to  humanity 
a  dynamic  impulse,  —  but'  partly  the  spoils  of  men 
whose    influence    is   hostile   to   progress.     Under   a 
regime  of  trusts  the  outlook  for  the  future  of  labor 
is  clouded,  since  the  rate  of  technical  progress  is  not 
what  it  would  be  under  the  spontaneous  action  of 
many  competitors.    The  gain  in  productive  poweri 
which  the  strenuous  race  for  perfection   insures  is] 
retarded,  and   may   conceivably    be    brought   to   a 
standstill,   by   the   advent   of    corporations    largely  I 
exempt  from  such  competition.    There  is  threatened 
a  blight  on  the  future  of  labor,  since  the  standard 
of  wages,  set  by  the  productivity  of  labor,  does  not 
rise  as  it  should,  and  the  actual  rate  of  wages  lags 
behind  the  standard  by  an  unnaturally  long  inter- 


n  I  '■ 


'■f  ' 


H 


T- 


'I 


I 


-I 


378 


ESSENTIAIJS    OF    ECONOMIC   THEORY 


val.  There  is  too  much  difference  »)etvveen  what 
lalx)r  produces  and  what  it  ought  to  produce,  and 
there  is  an  abnormally  great  difference  between 
what  it  actually  produces  and  what  it  gets. 

The  Fields  for  Monopolies  of  Different  Kinds.  — 
Monopoly  is  thus  a  general  perverter  of  the  industrial 
system;    but  there  are  two  kinds  of  monopoly,  of 
which  only  one  stands  contlemned  upon  its  face  as 
the   enemy   of   humanity.     For   a   state   monopoly 
there  is  always  something  to  be  said.     Even  socialism 
—  the  ownership  of  all  capital,  and  the  management 
of    all    industry    by    government.'^  —  is    making    in 
these  days  a  plea  for  it.self  that  win.s  many  adherents, 
and  the  demand  that  a  few  particular  industries  be 
socialized   appeals  to  many   more.     The   municipal 
ownership   of   lighting   plants,   street   railways   and 
the  like,  and  the  ownership  of  railroads,  telegraph 
lines,  and  some  mines  by  the  state  are  insistently 
demanded  and  may  pos.sibly  be  secured.     We  can 
fairly  a.'=sume  that,  within  the  period  of  time  that 
falls  within  the  purview  of  this  work,  general  so- 
f^ialism  will  not  be  introduced.     In  a  few  limited 
fields  the  people  may  accept  governmental  monop- 
olies,   but    private    monopolies    are    the    thing   we 
have  chiefly  to  deal  with;   and  it  is  to  them,  if  they 
remain  unchecked,  that  we  shall  have  to  attribute 
a  disastrous  change  in  that  generally  honest  and 
:  progressive  system  of  industry  which  has  evolved 
I  under  the  spur  of  private  enterprise. 

Two  Modes  of  Approachimj  a  Monopolistic  Con- 
dition.—The  approach  to  monopoly  may  be  e.\- 
tensive  or  intensive.  A  fairly  complete  monopoly 
may  be  established  in  some  part  of  the  industrial 
field,  and  the  area  of  its  operations  may  then  be 


I 


FA'lL    KFFKCT8   OF   MONOPOLY 


379 


extended.    Smelters  of  iron  an(i  steel,  after  attain- 
ing an  exclusive  possession  of  their  original  fields 
of  production,  may  become  carriers,  producers  of 
ore,  makers  of  wire,  plate,  and  structural  steel,  and  , 
builders  of  ships,  bridges,  etc.  ! 

On  the  other  hand,  a  great  corporation  may  have, 
at  the  outset,  but  little  monopolistic  power,  and  it 
may  then  acquire  more  and  more  of  it  within  the 
original   field   of    its   operations.     It   may   at    first 
make  competition  diflficult  and  crush  a  few  of  its 
rivals,  and    then,   as   its   power   increases,    it   may 
make  competition  nearly  impossible  in  the  greater  , 
part  of  its  field  and  drive  away  nearly  all  the  rivals 
who  remain.     It  is  necessary  to  form  a  more  ac- 
curate idea  than  the  one  which  is  commonly  prev- 
alent of  what  actual  monopolies  are,  of  what  they 
really  do,  of  what  they  would  do  if  they  were  quite 
free  to  work  their  will,  and  of  what  tliey  will  do,  on 
the  other  hand,  if  they  are  effectively  controlled 
by  the  sovereign  state.     Regulation  of  monopolies 
we  must  have;     that  is  not  a  debatable   question. 
The  sovereignty  of    the  state  will  be  preserved  in 
industry  and  elsewhere,  and  it  is  perfectly  safe  to 
assert  that  only  by  new  and  untried  modes  of  as- 
serting that  sovereignty   can  industry   hereafter  be 
in  any  sense  natural,  rewarding  labor  us  it  should, 
insuring  progress,  and  holding  before  the  eyes  of 
all   classes  the   prospect   of  a   bright   and   assured 
future.    We  are  dependent  on  action  by  the  state 
for  results  and  prospects  which  we  formerly  secured 
without  it ;   but  though  we  are  forced  to  ride  rough- 
shod over  laisticz-faire  theories,   wc  do  ho  in  order 
to  gain  the  end  which  those  theories  had  in  view, 
namely,  a  system  actuated  by  the  vivifying  power 


;  ■.  J 


ii 


* 


%\ 


i-  * 


380 


ESSENTIALS    OF   ECONOMIC   THEORY 


of  competition,  with  all  that  that  signifies  of  present 
and  future  good. 

The  Nature  of  a  Tnte  Monopoly.  -  The  exclunive 
i  privilege  of  making  and  selling  a  product  is  a  mo- 
[nopoly  in  its  completest  form.  This  means,  not  only 
that  there  is  only  one  establishment  which  is  actually 
creating  the  product,  but  there  is  onlv  one  which 
is  able  to  do  so.  This  one  can  produce  as  much 
or  as  little  as  it  pleases,  and  it  can  raise  the  price 
of  what  it  sells  without  having  in  view  any  other 
consideration   than   its  own   interest. 

The  Possibility  of  the  Form  of  Monopoly  without 
the  Pou-cr  of  It.  —  A  business,  however,  may  have 
the  form  of  a  monopoly,  but  not  its  genuine  power. 
It  may  consolidate  into  one  great  corporation  all 
the  producers  of  an  article  who  send  their  goods 
into  a  general  market,  and  if  no  rivals  of  this  cor- 
poration then  appear,  the  public  is  forced  to  buy 
from  it  whatever  it  needs  of  the  particular  kind 
of  goods  which  it  makes.    Consumers  of  vl'"  of  our 
table  may  find  that  they  can  get  none  of  it  except 
from  a  single  company.     Yet  the  price  may  con- 
ceivably be  a  normal  one.     It  may  stand  not  much 
above  the  cost  of  production  to  the  monopoly  itself. 
If  it  tloes  so,  it  is  because  a  higher  price  would  invite 
competition.    The    great    company    prefers    to    sell 
all  the  goods  that  are  required  at  a  moderate  price 
rather  than  to  invite  rivals  into  its  territory.     This 
is  a  monopoly  in  form  but  not  in  fact,  for  it  is  shorn 
lof  Its  injurious  power;    and  the  f'ling  that  holds 
V    firmly    in    check    is    potential    competition.    The 
f>.ct_  that  a  rival  cm  appear  ancj  inll  Rpp,-n.  jf  the 
Bncepgorr-aBoVe  the  reasonable  Invol  nt  pjuj^jt 
stanTI^  ir.luces  the  corporation  to  produce  goods 


EVIL    EFFECTS    OF  MONOPOLY 


381 


enough  tokcopthe  price  at  tlm..  l('vcl_  I'nd'T  such 
a"licarl^(i('al  coiuTTtion  the  public  would  get  the 
full  benefit  of  the  economy  which  very  lar^e  pro- 
duction gives,  notwithstanding  that  no  actual  conj- 
petition    would    go    on.     Prices    would    still    hover 
near  the  low  level  of    cost.      The  most    economical 
state  conceivable  is  one  in  which,  in  many  lines  of 
business,  a  single  great  corporation  should  produce 
all  the  goods  and  sell  them  at  a  price  so  slightly 
above  their  cost  as  to  afford  no  incentive  to  any 
other  producer  to  come  into  the  field.     Since  the 
first  trusts  were  formed  the  efficiency  of  potential 
competition  has  been  so  constantly  displayed  that 
there  is  no  danger  that  this  regulator  of  prices  will 
ever  be   disregarded.    ^  "sts  have  learned  by  ex- 
perience that  too  great  ;   .  increase  in  the  pric(<s  of 
their  products  "builds  mills."     P  causes  new  pro- 
ducers who  were  only  potentially  in  the  field  actually 
to  come  into  it  and  to  begin  to  make  goods.    To 
f»restall   this,  the   trusts    have    learned   to    pursue 
a  more  conservative  policy  and  to  content  them- 
selves with  smaller  additions  to  the  prices  of  their 
wares.     If  it  were  not  for  this  regulative  work  of 
the  potential  competitor,  we  should  have  a  regime 
of  monopoly   with   its   unendurable   evils;    and   if, 
on  the  other  hand,  the  regulator  were  as  efficient 
as  it  .should  be,  we  should  have  a  natural  system 
in  which  complete  freedom  would  rule.    The  limit- 
less  difference   between   these   conditions   measures 
the  importance  of  potential  competition.* 

>  For  an  early  statement  of  this  principle  the  reader  is 
referred  to  the  chapter  on  "The  Persislence  of  Compctitu.!i," 
by  Professor  F.  H.  GiddinR-s,  in  a  work  entitled  "  The  Modern 
Distributive  Process,"  written   jointly  by  Professor  Giddinga 


m 


I J 


:;i- 


Iv. 


»■ 


Pi 


m 


382 


ESSENTIALS    OF   ECONOMIC  THEORY 


1^     li 


Cokt  of  Production  in  Indeyendent  Mills  a  ^tandnrd 
of  Pric^  —  A  consolidated  company  will  ultimately 
have  a  real  but  small  advantage  over  a  rival  in  the 
cost   of  producing  and   selling   its   goods;     but   at 
present  the  advantage  is  often  with  the  rival.     His 
plant  is  often  superior  to  many  of  those  operated 
by    the   trust.     When   the   combination   brings   its 
mills  to  a  maximum  of  efficiency  and  then  reaps 
the  further  advantage   which  consolidation   itself  in- 
sures, it  will  be  able  to  make  a  small  profit  while 
selling  goods  at  what  they  cost  in  the  mills  of  its 
rival.    This  cost  which  a  potential  competitor  will 
incur  if  he  actually  comes  into  the  field  sets  the 
natural  standard  of  price  in  the  new  regime  of  seem- 
ing  monopoly ;  and  it  will  be  seen  that  if  this  natural 
price  really  ruled,  the  monopoly  would  have  only 
a  formal  existence      It  would  be  shorn  of  its  power 
to  tax  the  public. 

Partial  Monopolies  now  Common.  — Wh&t  we 
have  is  neither  the  complete  monopoly  nor  the 
merely  formal  one,  but  one  that  has  power  enough 
to  work  injury  and  to  be  a  menace  to  industry  and 
politics.  If  \  long  perverts  industry,  it  will  be 
because  it  perverts  politics  —  because  it  baffles  the 
p(>ople  in  their  effort  to  make  and  enforce  laws 
which  would  keep  the  power  of  competition  alive. 
In  terms  oi  our  table  the  subgroups  are  coming 
to  resemble  single  overgrown  corporations.  Each 
of  them,  where  this  movement  is  in  progress,  is  tend- 
ing toward  a  state  where  it  will  have  a  single  entre- 
preneur—one of  tliosc  overgrown  corporations  which 
resemble  monopolies  and  are  commonly  termed  so. 

and   tho  pros.>nt   writor.     This  rhaptor  first  appeared    as  an 
article  in  the  Political  Science  Quarterly  for  1887 


EVIL    EFFECTS   OF   MONOPOLY 


383 


Compleie  monopolies,  as  we  have  said,  they  are  not; 
and  yet,  on  the  other  hand,  they  are  by  no  means 
without  monopolistic  power.  They  are  held  some- 
what in  check  by  the  potential  competition  we  have 
referred  to,  but  the  check  works  imperfectly.  At 
some  points  it  restrains  the  corporations  quite 
closely  and  gives  an  approach  to  the  ideal  results, 
in  which  the  consolidation  is  very  productive  but 
not  at  all  oppressive;  while  elsewhere  the  check 
has  very  little  power,  oppression  prevails,  and  if 
anything  holds  the  exactions  of  the  corporation 
within  bounds,  it  is  a  respect  for  the  ultimate  power 
of  the  government  and  an  inkling  of  what  the  people 
may  do  if  they  are  provoked  to  drastic  action. 

Two  Policies  open  to  the  State.  —  The  alternatives 
which  are  open  to  us  are,  in  this  view,  reduced  to 
two.  Consolidation  itself  is  inevitable.  If,  in  any 
great  department  of  production,  it  croates  a  true 
monopoly  which  cannot  be  otherwise  controlled,  the 
demand  that  the  business  be  taken  over  by  the 
government  and  worked  for  the  benefit  of  the  public 
will  become  irresistible.  If  it  does  not  become  a 
true  monopoly,  the  business  may  remain  in  private 
hands.  Inevitable  consolidation  with  a  choice  be- 
tween governmental  production  and  private  pro- 
duction is  offered  to  us.  "We  arc  at  liberty  to  select 
the  latter  only  if  potential  competition  shall  be 
made  to  be  a  satisfactory  regulator  of  the  action 
of  the  great  corporations. 

The  Future  Dependent  nn  Keeping  the  Field  open 
for  Competitors.  —  Potential  competition,  on  which, 
as  it  would  seem,  most  of  what  is  good  in  the  pres- 
ent economic  system  dej)cn(ls,  has  also  the  fate 
of  the  future  in  its  hands.     Existing  evils  will  de- 


r  : 
\  i 


'^ 


lil 


:i1: 


""  »  .■'  1 


I  HI 


Hi 


:f'i 


384 


ESSENTIALS   OP   ECONOMIC   THEORY 


crease  or  increase  according  as  this  regulator  shall 
work  well  or  ill.  Yet  it  is  equally  true  that  the 
government  has  the  future  in  its  hands,  for  the 
potential  competition  will  be  weak  if  the  government 
shall  do  nothing  to  strengthen  it.  It  is,  indeed, 
working  now,  and  has  been  working  during  the 
score  of  years  in  which  great  trusts  have  grown  up; 
but  the  effects  of  its  work  have  been  unequal  in 
different  cases,  and  it  is  safe  to  say  that,  in  the  field 
as  a  whole,  its  efficiency  has,  of  late,  somewhat 
declined.  With  a  further  decline,  if  it  shall  come, 
nrices  will  further  ri'-'>,  wages  will  fall,  and  progress 
will  be  retarded.  I'he  natural  character  of  the 
dynamic  movement  is  at  stake  and  the  continuance 
of  so  much  of  it  as  now  survives  and  the  restoration 
of  what  has  been  lost  depend  on  state  action. 

The  Impossibility  of  a  Laissez-faire  Policy.  — 
'Jreat  indeed  is  the  contrast  between  the  present 
condition  and  one  in  which  the  government  had 
little  to  do  but  to  let  industry  alone.  Letting  free 
competitors  alone  was  once  desirable,  but  leaving 
monopolies  quite  to  themselves  is  not  to  be  thought 
of.  It  would,  indeed,  lead  straight  to  socialism, 
under  which  the  governn^.ent  would  lay  hands  on 
business  in  so  radical  a  way  as  to  remove  the  private 
entrepreneurs  altogether.  If  we  should  try  to  do 
nothing  and  persist  too  long  in  the  attempt,  we 
might  find  ourselves,  in  the  end,  forced  to  do  every- 
thing. What  IS  of  the  utmost  importance  is  the 
kind  of  new  work  the  government  is  called  on  to  do. 
It  is  chiefly  the  work  of  a  sovereign  and  not  that 
of  a  producer.  It  is  the  work  of  a  law-giving  power, 
which  declares  what  may  and  what  may  not  be 
done  in  the  field  of  business  enterprise.     It  is  also 


EVIL    EFFECTS    OF   MONOPOLY 


385 


the  work  of  a  law-enforcing  power,  which  makes 
mire  that  its  decrees  are  something  more  than  pious 
wishes   or   assertions  of   what   is   abstractly   right. 
AH  of  this  is  in  harmony  with  the  old  conception 
of  the  state  as  tlie  protector  of  property  and  the 
preserver  of  freedom.     The  people's  interests,  which 
the  monopoly  threatens,  have  to  be  guarded.    The 
ri<'ht  of  every  private  competitor  of  a  trust  to  enter 
a  "field  of  business  and  to  call  on  the  law  for  pro- 
tection whenever  he  is  in  danger  of  being  unfairly 
clubbed  out  of  it,  is  what  the  state  has  to  preserve 
It  i^   only  protecting  property  in  more  subtle  and 
diih.ult  ways  than  those  in  which  the  state  has 
always  protected  it.    The  official  who  restrains  the 
plundering  monopoly,  preserves  honest  wealth,  and 
keeps    open   the    field    for    independent    enterprise, 
does  on  a  grand  scale  something  that  is  akin  to  the 
work  of  the  watchman  who  patrols  the  street  * 
preserve  order  and  arrest  burglars. 

A   Possible  Field  for  Production  by  the  State.— 
There  is  a  possibility  that  in  a  few  lines  of  production 
the   American   government   may  so   far  follow  the 
route  marked  out  by  European  states  as  to  own 
plants  and  even  operate  them,  and  may  do  so  m 
the   interest   of    general    competition,     ^i    may    con- 
struct a  few  canals,  with  the  special  view  to  con- 
trolling  charges   made   by   railroads.     It   may   ovvn 
coal  mines  and  either  operate  them  or  control  the 
mode  of  operating  them,  for  the  purpose  of  curbmg 
the  exactions  of  monopolistic  owners  and  securing 
a   continuous   supply   of   fuel.     It   may   even   own 
some  railroails  for  the  sake  of  making  its  control  of 
freight    charges    more    complete.    Such    actions    as 
thele  may  be  slightly  anomalous,  since  they  break 

2ti 


386 


1« 


ESSENTIALS   OP   ECONOMIC  THEORY 


away  from  the  policy  of  always  regulating  and 
never  owning;  nevertheless,  they  are  a  part  of  a 
general  policy  of  regulation  Lud  a  means  of  escape 
from  a  policy  of  ownership.  The  selling  of  coal  by 
the  state  may  help  to  keep  independent  manufactur- 
ing alive,  and  carrying  by  the  state  may  do  so  in  a 
more  marked  way.  If  so,  these  measures  have 
a  generally  anti-socialistic  effect,  since  they  obstruct 
that  growth  of  private  monopoly  which  is  the  leading 
cause  of  the  growch  of  socialism. 

Evils  within  the  Modem  Corporation.  —  The  great 
corporation  brings  with  it  some  internal  evils  which 
might  exist  even  if  it  never  obtained  a  monopoly  of 
its   field.     In   this   class   are  the   injuries   done   by 
officers  of  the  corporation  to  the  owners  of  it,  the 
I  stockholders.    A  typical  plundering  direcftor  has  even 
more  to  answer  for  by  reason  of  what  he  does  to 
his  own  shareholders  than  because  of  what  he  and 
jthe  corporation  may  succeed  in  doing  to  the  public. 
In  the  actual  amount  of  evil  done,  the  robbing  of 
shareholders  is  less  important  than  the  taxing  of 
consumers  and  the  depressing  of  wages,  which  occur 
when  the  effort  to  establish  a  monopoly  is  success- 
ful;   but  in  the  amount  of  iniquity  and  essential 
meanness  which  it  implies  on  the  part  of  those  who 
practice  it,  it  takes  the  first  rank,  and  its  effect  in 
perverting  the   economic   system   cannot    be   over- 
looked.    The  director  who  buys  property  to  unload 
upon   his  own  corporation  at  a  great  advance  on 
Its  cost,  or  wiio  alternately  depresses  the  business 
of  his  corporation-  and  then  restores  it,  in  order  that 
he  may  profit  by  the  fall  and  the  rise  of  the  stock, 
not  only  does  that  which  ought  to  confine  his  future 
labors  to  such  as  he  could  perform  in  a  penitentiary. 


EVIL   EFFECTS   OF  MONOPOLY 


387 


but  does  much  to  vitiate  the  action  of  the  economic 
law  which,  if  it  worked  in  perfection,  would  give 
to  the  private  capitalist  a  return  conformable  to 
the  marginal  product  of  the  capital  he  owns.  A 
sound  industry  requires  that  the  state  should  protect 
property  where  this  duty  is  now  grossly  neglected. 

If  more  pubHcity  will  h"lp  to  do  this,  — if  light- 
ing street  lamps  on  a  moral  slum  will  end  some  of 
the  more  despicable  acts  committed  by  men  who 
hold  other  men's  property  in  trust,  —  sound  economics 
will  depend  in  part  on  this  measure,  but  it  depends  in 
part  on  more  positive  ones. 

The  investment  of  capital  is  discouraged  and 
an  important  part  of  the  dynamic  movement  is 
hindered  wherever  shareholders  are  made  insecure; 
and  therefore  the  entire  relation  of  directors  to 
those  whose  property  they  hold  in  trust  needs  to 
be  supervised  with  far  more  strictness  than  has 
ever  been  attempted  under  American  law.  When 
invested  capital  shall  be  quite  out  of  the  range  of 
buccaneers'  actions,  it  will  produce  more,  increase 
more  rapidly,  and  the  bettor  do  its  part  toward 
maintaining  the  wages  of  labor. 

Perversions  of  the  Economic  System  by  the  Action 
of  Promoters.  —  The  state  will  be  carrying  out  its 
established  policy  if  it  shall  eiYectively  control  the 
action  of  promoters  in  their  relation  to  prospective 
investors.  The  man  who  is  invited  to  become  a 
stockholder  has  a  right  to  know  the  facts  on  which 
the  value  of  the  property  offered  to  him  depends. 
How  many  plants  does  the  consolidated  corporation 
own?  How  mucli  did  they  cost?  What  is  their 
present  state  of  efficiency?  What  have  been  their 
earnings    during    recent    years?    Concerning    these 


If 


:i 


\i  m' 


ft        !'■« 


388 


ESSENTIALS   OF    ECONOMIC   THEORY 


¥ 

r. 


things  and  others  which  go  to  make  up  a  correct 
estimate  of  the  value  of  what  the  promoter  is  selling, 
the  purchaser  needs  full  and  trustworthy  informa- 
tion, and  an  obvious  function  of  the  law  is  to  see 
that  he  gets  it.  That  such  action  would  guard 
investors'  personal  rights  is,  of  course,  a  reason  for 
taking  it;  but  the  reason  that  he-e  appeals  to  us 
is  th(  fact  that  it  would  remove  a  second  perversion 
of  the  economic  system,  accelerate  the  increase  of 
capital,  and  help  in  securing  a  distribution  of  wealth 
wnich  would  be  more  nearly  in  accordance  with 
natural  law. 

Perversions  of  the  System  caused  by  the  Action  of 
Corporations  in  their  Entirety.  —  More  directl>-  within 
the  domain  of  pure  economics  is  the  relation  between 
the  typical  great  corporation  and  the  majority  of 
the  public  which  is  wholly  outside  of  it.    In  the 
common  mird  this  relation  also  often  appears  as 
that  of  plunderers  and  plundered,  and  what  it  often 
has  actually  been,  is  a  relation  between  corporations 
which  have  exacted  a  certain  tribute  and  a  body 
of  consumers   which  has   had  to  pay  the  tribute. 
Bound  up  with  this  general  relation  between  the 
manufacturing  corporation  and  the  consuming  public 
is  one  between   it  and   producers  of  raw  material 
which  it  buys  and  with  laborei-s  whom  it  hires.     In 
this  last  relation  what  is  endangered  is  the  normal 
rate  of  pay,  present  and  future.     The  type  of  measure 
which  protects  consumers  protects  the  other  parties 
who  are  affected  by  the  great  corporation's  policy. 
Workers  are  safe  and  producers  of  raw  materials 
are   measurably   so  if  the  power  of  competition  in 
the  making  and  selling  of  the  goods    i  kept  alive. 
If  we  prevent   the  trust  from  taking  tribute  from 


•'if  1  *  - 


EVIL   EFFECTS   OF   MONOPOLY 


389 


the  purchasing  public,  we  shall  by  the  same  means 
prevent  it  from  oppressing  laborers  and  farmers. 

Why  the  Business  of  a  Monopoly  should  never  he 
regarded  as  a   Private    Interest.— The    people   are 
already   putting   behind   them   and   ought   to   put 
completely  out  of  sight  and  mine!  the  idea  that  the 
business  of  a  monopoly  is  a  private  enterprise  which 
its  officers  have  a  right  to  manage  a.-  they  please. 
A  corporation  becomes  a  public  functionary  from 
the  time  when  it  puts  so  many  of  its  rivals  out  of 
the  field  that  the  people  are  dependent  on  it.     As 
well  might  the  waiter  who  brings  food  to  the  table 
claim  that  the  act  is  purely  his  own  affair  and  that 
the  customers  and  the  manager  have  no  right  of  ^ 
interference,  however  well  or  ill  the  customers  may  ' 
be  served,  as  a  combination  of  packers  might  claim 
thao  any  important  detail  of  their  business  concerns  ^ 
them  only.    The  illustration  is  a  weak  one;    for  in 
the  case  of  a  trust  which  controls  a  product  that  is 
needed  by  the  public,  it  is  the  full  majesty  of  the 
people  as  a  whole  which  is  in  danger  of  being  set  at 
naught.     Such  a  com-pany   is  a  public  servant  in< 
all  essential  particulars,  and  although  it  is  allowed  » 
to  retain  a  certain  autonomy  in  the  exercise  of  its 
function,  that  autonomy  does  not  go  to  the  length 
of  liberty  to  WTong  the  public  or  any  part  of  it. 
The  preservation  of  a  sound  industrial  system  re- 
quires   that    governments    shall    forestall    injuries 
which  the  interests  of  the  monopolistic  corporation 
impels  it  to  inflict.     No  discontinuance  of  essential 
services,  no  stinting  of  them,  and  no  demand  for 
extortionate    returns    for    them    can    b*^    iuhmied 
without  a  perversion  of  the  economic  system.^    The 
natural  laws  we  have  presented  will  work  imper- 


I-  5, 


-? 


390 


ESSENTIALS  OP  ECONOMIC  THEORY 


fectly  if,  for  example,  the  danger  of  a  coal  famine 
shall  forever  impend  over  the  public  or  if  this  fuel 
shall  be  held  at  an  extortionate  price.    Workmen, 
indeed,  have  a  larger  stake  than  have  others  in  the 
maintenance  of  a  fair  field  for  competing  producers 
and  an  open  market  for  labor,  but  other  classes  feel 
the  vitiating  of  the  industrial  system  which  occurs 
when  the  fair  field  and  the  open  market  are  absent. 
Why  the   Motive  which    once   favored   Non-inter- 
ference in   Industry  by  the  State  now  favors  Inter- 
ference.—We  have   said   that   what   is   needed   is 
vigorous  action  by  the  state  in  keeping  alive  the 
force  on  which  the  adherents  of  a  laissez-faire  policy 
.rested  their  hope  of  justice  and  prosperity.    These 
fruits  of  a  natural   development  have  always  de- 
pended on  competition,  and  they  still  depend  on  it, 
'though  its  powpr  will  have  to  be  exerted  in  a  new 
'way.    This  requires  a  special  action  by  the  state; 
but  in  taking  such  action  the  government  is  con- 
forming its  policy  to  the  essential  part  of  the  lav><^z- 
faire  doctrine.    It  lays  hands  on  industry-   co-day 
I  for  the  very  reason  which  yesterday  compelled  it 
to  keep  them  off  —  the  nPrPssitY  nf  r^^—Lhc  a 
beneficent  rivalry  in  the  domain  of  production. 

America  ihe  j^irtfipiace  of  Consolidated  Corpora- 
tions. ~  Consolidations  of  the  kind  that  require 
vigorous  treatment  by  the  state  have  their  special 
home  in  America.  They  have  taken  on  a  number 
of  forms,  but  arc  coming  more  and  more  into  the 
most  efficient  form  they  have  ever  assumed,  that  of 
the  corporation.  The  holding  company  is  the 
successor  of  the  former  trust.  The  method  of 
union  by  which  stockholders  in  several  corporations 
surrendered  their  certificates  of  stock  to  a  body  of 


cVi-. ».':.» 


EVIL  EFFECTS  OF  MONOPOLY 


391 


trustees  and  received  in  return  for  them  what  were 
called  trust  certificates,   has  been  abandoned,  and 
the  readiness  with  which  this  has  been  done  has 
been  due  to  the  fact  that  there  are  Ijottcr  modes  of 
accomplishing   the   purpose   in    view.     A   new   cor- 
poration can  be  formed,  and,  thanks  to  those  small 
states  which  thrive   by   issuing  letters  of   marque, 
it  can  be  endowed  with  very  extensive  powers.     It 
can,   of  course,   buy   or  lease   mills,  furnaces,  etc., 
but  what  it  can  most  easily  do  is  to  own  a  controlling 
portion  of  the  common  stock  of  the  companies  which 
own  the  plants.    The  holding  company  has  a  sinister 
perfection  in  its  mode  of  giving  to  a  minority  of 
capital  the  control  over  a  majority.     It  is  possible 
that  the  actual  capital  of  the  original  corporation 
may  be  mainly  a  borrowed  fund  and  may  be  rep- 
resented  by  an    issue  of    bonds,   while  the   stock- 
holders may  have  contributed  little  to  the  cost  of 
their   plants   and   their   working  capital;    and   yet 
this  common  stock  may  conf(>r  on  its  owners  the 
control   of    the    entire    business.     The    corporation 
that  buys  a  bare  majority  of  this  cunnnon  stock, 
may  have  an  absolute  power  over  the   producing 
plants  and  their  operations.     If  the  liolding  com- 
pany should  secure  much  of  its  own  capital  by  .in 
issue  of  bonds,   the  amount  which  its  own  stock- 
holders  would   have   to   contribute   would   be   only 
a  minute   fraction   of   the   capital   placed   in   their 
hands,  and  yet  it  might  insure  to  thcMi.  the  control 
of  a  domain  that  is  nothing  less  than  an  industrial 
empire,  if   indeed   they  are   not   themselves  obliged 
to  surrender  the  government  of  it  to  an  inncrmnst 
circle  composed  of  directors. 
Earlier  Forms  of   Union.— There  are   forms  of 


i  V 


1 


i."!| 

If* 


392 


ESSENTIALS   OF   ECONOMIC   THEORY 


union  which  are  less  complete  than  this  and  have 
been  widely  adopted.    There  was  the  original  com- 
pact among  rival  producers  to  maintain  fixed  prices 
for   their   goods.     It    was   a   promise    which   every 
party  in  the  transaction  was  bound  in  honor  to  keep, 
but  impelled  by  interest  to  break ;  and  it  was  morally 
certain  to  be  broken.    There  was  this  same  con- 
tract  to   maintain   prices   strengthened   by  a   cor- 
responding contract   to   hold   the   output   of  every 
plant  within  definite  limits.    If  this  second  promise 
were  kept,  the  first  would  be  so,  since  the  motive 
for  cutting  the  price  agreed  upon  was  always  the 
securing   of   large   sales,    and   this   was    impossible 
without   a   correspondingly   large   production;    but 
security  was  needed  for  the  fulfillment  of  the  second 
promise.    This  security  was  in  due  tinie  afforded, 
and  there  was  perfected  a  form  of  union  which  was 
a  favorite  one,  since  it  did  not  merge  and  extinguish 
the    original    corporations,    but    allowed    them    to 
conduct  their  business  as  before,  though  with  a  re- 
stricted  output  and   with   prices   dictated    by  the 
combinations.    As   a   rule   each   of   the   companies 
paid  a  fine  into  the  treasury  of  the  pool  if  it  produced 
more  than  the  amount  allotted  to  it,  and  received 
a  bonus  or  subsidy  if  it  produced  less.    This  form 
has  more  of  kinship  with  the  Kartel  of  Germany  than 
the  other  American  forms,  and  it  might  have  con- 
tinued to  prevail  in  our  country  if  the  law  had  treated 
it   with   toleration.     It   leaves   the   power   of  com- 
petition less   impaired   than  does   the  consolidatcrl 
corporation,  of  which  the  laws  are  more  tolerant. 
By   repressing   those   unions   which   can    be   easily 
defined  and  treated  as  monopolies  we  have  called 
into  being  others  which  are  far  more  monopolistic 


EVIL  EFFECTS   OF  MONOPOLY 


393 


and  dangerous.    The  economic  principles  on  which 
the  regulation  of  all  such  consolidations  rests  apply 
especially  to  the  closer  unions  which  take  the  cor- 
porate shape.     To  the  extent  that  other  forms  of 
union  have  any  monopolistic  power  the  same  prin- 
ciples apply  also  to  them;    but  we  shall  see  why  it 
is  that  the  pools  which  the  law  forbids  have  little 
of  this  power  and  the  corporations  have  much  of  it. 
The  Condition  which  precludes  Trite  Monopoly.  — 
A  monopoly  grows  up  when  a  company  keeps  such 
perfect  guard  oveT  its  economic  field  that  new  rivals 
cannot  enter  without  exposing  themselves  to  peril. 
As  we  have  seen,  it  is  not  always  necessary  that 
the  rival  company  shoukl  be  formed.     It  is  enough 
that  it  should  be  able  to  be  formed  and  to  enter 
the  field  with  safety.     In  that  case  it  will  actually 
appear  if  an  inducement  is  offered.    Such  an  in- 
ducement is  always  afforded  when  the  trust  puts 
an  unnaturally  high  price  on  its  product  — a  price 
above  that  standard  set  by  the  co.st  of  production 
which  would  rule  in  a  normal  market. 

Specific  Means  of  Repressing  Competition.  —  In 
practice  a  condition  is  created  in  which  the  new 
competitors  are  reluctant  to  appear;  for  the  con- 
solidated company  has  dangerous  weapons  with 
which  it  can  assail  them.  It  can  often  secure  spe- 
cially low  rates  for  the  transportation  of  its  products, 
and  this  is  sometimes  enough  to  make  the  com- 
petitor's prospect  hopeless.  Further,  the  "trust"  — 
with  or  without  the  aid  offered  by  the  special  and 
low  freight  charges  — can  enter  the  particular 
corr.er  of  the  iieid  where  a  small  rival  is  operating, 
sell  goods  for  less  than  they  cost,  and  drive  off  the 
rival,  while  maintaining  itself  by  the  high  prices 


\  #7 


394 


ESSENTIALS   OP   ECONOMIC   THEORY 


It  exacts  everywhere  else.     Again,   it   may  reduce 
the  price  of  one  variety  of  goods,  which  a  particular 
competitor  is  making,  and  crush  him,  while  it  makes 
a  profit  on  all  other  varieties  of  goods.    Still  again 
It  may  resort  to  the  "factor's  agreement,"  by  refus- 
ing to  sell  at  the  usual  wholesalers'  rate  any  of  its 
own  products  to  a  merchant  who  handles  products 
of  Its  rivals.     If  some  of  its  goods  are  o-'  a  kind 
that  the  merchant  must  have,  this  measu..  brings 
him  to  terms,  causes  him  to  refuse  to  handle  inde- 
pendent  products,   and   makes   it   difficult   for  the 
rival  producer  to  reach  the  public  with  his  tender  of 
goods.     The  trust  can  organize  special  corporations 
for  making  war  on  competitors  while  itself  evading 
responsibility.    A    bogus    company    which,    in    an 
aggravat(Ml  case,  is  a  rogue's  alias  for  a  parent  cor- 
poration, may  be  formed  for  the  purpose  of  more 
safely  doing  various  ki.   .s  of  predatory  work 

The  Economic  Necemty  of  Doing   what  is  legally 
Difficult.  —  From  the  point  of  view  of  «n  -onomic 
theorist   it   is   enough   to  show  that   the   practices 
which  cut  off  the  potential  competitor  from  a  safe 
entrance   into   the   field   of   production    so   pervert 
the   economic   system    as   to  hold  in  abeyance   its 
most  fundamental  force,  that  of  competition.    They 
vitiate   the  action   of  every  law  which  depends  on 
competition.     Value,    wages,    interest,    profits,   and 
the  very   structure   of   society  feel    the   perverting 
effect   of   this   repression   of   the   force  that   under 
normal    conditions   serves    to    adjust    them      From 
a  practical  point  of  view  it  is  enough  to  show  that 
the  existence  of  such  pnar-tices  -  if  the  monopolies 
that  grow  out  of  them  shall  continue  and  increase 
—  present  to  the  people  the  alternative  of  accept- 


■m 


EVIL    EFFECTS    OF   MONOPOLY 


395 


ing   an    economic  state   which    is   unondurablo,   or 
accomplishing,  in  a  legal  way,  what  many  already 
pronounce    impossible.     For     he    purpose    of    this 
treatise  it  suffices  to  point  to  the  fact  that  few  at- 
tempts worth  mentioning  have  l)een  made  to  sup- 
press any  of  these  practices  except  the  first  — that 
of  favoritism  in  connection  with  freight  charges  — 
and  that  in  the  case  of  this  practice  only  a  begin- 
ning of  serious  effort  has  been  made.     While  there 
is  some  excuse  for  abandoning  a  purpose  when  long 
and  determined  effort  to  execute  it  has  failed,  then? 
is  no  possible  excuse  for  concluding,  in  advance  of 
such  effort,   that   a  systematic   policy   which   gives 
a  promise  of  saving  us  from  an  intolerable  outcome 
is  impracticable.     All  the  props  of  monopoly  should 
be  taken  away  and  not  one  merely,  and  before  this 
shall  be  tried  radical  measures  will  not  be  in  order. 
Socialism  will  not  be  fairly  before  the  people's  par- 
liament till  it  shall  cume  as  the  only  escape  from 
a  condition  of  private  monopoly.     What  economic 
law  clearly  shows  is  that  monopoly  will  not  come 
if  the  practices  on  which  it  depends  snuii  be  sup- 
pressed, and  the  people  may  be  trusted  to  deter- 
mine whether  the  suppression  is  or  is  not  possible. 
That  they  may  decide  this  question  the  issue  that 
depends  on  it  must  be  brought  before  them;    and 
all  that  falls  within  the  sphere  of  the  economist  is 
the  stating  of  the  effects  of  monopoly,  the  causes 
of  its  existence,  and  the  public  action  that  if  taken 
will  remove  these   causes.    The  preserv  tion   of  a 
normal  system   of  industry  and  a  normal  division 
of  its  products  requires  the  suppression  of  p.W  those 
practices  of  great  corporations  on  which  their  mo- 
nopolistic power  depends. 


i    i 


(    f 


U\ 


!.%   '. 


f-l 


(     5 


^ 


i  'u 


I 

f,  ; 
f  ■ 


a! 


CHAPTER  XXIII 

GENERAL    ECONOMIC    LAWS    AFFECTING 
TRANSPORTATION 

Of  all  the  vanous  clubs  used  by  trusts  for  attack- 
Tig  rivals  and  driving  them  from  the  field,  the  first 
m  order  is  the  one  which  depends  on  getting  special 
rates    for    transportation.      Railroads    develop     no- 
nopo lies  within  their  own  sphere  and  also  contribute 
greatly  to  the  development  of  monopolies  elsewhere 
The  second  fact  is  the  more  important,  but  both 
require   attention.     By   reason    of   its   special   con- 
nection with  producers'  monopolies  does  the  function 
of  the  common  carrier  have  much  to  do  in  deciding 
the  question  whether  an  economic  revolution  is  or 
IS  not  impending.     It  is  safe  to  say  that  it  is  im- 
minent as  a  possibility  and  will  become  probable 
If  the  fnvontism  shown  by  carriers  to  great  shippe,^ 
IS  not  ehectually  repressed. 

How  the  Consolidation  of  Railroads  makes  the 
Repression  of  Favoritism  Easy.  -  It  is  also  safe  to 
say  that  such  repression  will  be  easy  if  the  con- 
solidation of  rnilroads  themselves  shall  actually 
go  to  the  utmost  possible  length.  With  all  lines 
under  one  cenvral  control  and  earnings  entirely 
pooled,  there  would  he  no  motive  for  granting  special 
tavors  to  any  shipper  except  as  it  might  come  through 
a  corrupt  relation  between  the  shipper  and  some 
ulliciais  of  the  railroads.  To  the  carrying  -,rpora- 
tion  the  giving  of  a  rebate  would  mereh     wean  a 

396 


PRINCIPLES   OF   Tl.ANSPORTATION 


397 


surrendering  of   some   possible   profits.    With   rail- 
roads consolidated  the  threat  of  the  great  shipper 
to  divert  his  freight  from  one  line  to  another  would 
lose   all   its  effectivenc'ss    and   the   interests  of  the 
stockholders  in  the  g  nonu  i-riying  company  would 
demand  high  rates   'ro-n   all.     Tlio  law   forbidihng 
rebates   and   all   otl    i    forias   of    favoritism   would 
assist  the  railroad  compaiiV  r.i  =aiiying  out  its  own 
policy,   and   would   be   obeyed   with   the   readmess 
with  which  an  order  to  pocket  an  increased  gain  is 
naturally  complied  with. 

A  Danger  which   becomes    greater  as   Discrimina- 
tions become  Fewer.— Th\s   reveals  the    fact    that 
the  consolidation  which  makes  the  suppressing  of 
discriminations  easy  will  make  an  all-round  advance 
of  rates  possible,  in  ^o  far  as  m-^-ely  economic  m- 
fluences    are    concerned.     Nothing    but    the    power 
of  the  state  itself  can  prevent  this;    and  while  the 
consolidation  that  would  be  perfect  enough  to  stop 
discriminations  has  not  yet  taken  place,  enough  of 
consolidation  has  been  secured  to  cause  some  advance 
in  the  general  scale  of  freight  charges  and  to  threaten 
much  more.     It  already  rests  with  the  government 
to    avert   this    second    evil.     Monopolies    extendmg 
throughout  the  field  of  production  would  mean  a 
demand  for  socialism  which  could  hardly  be  resisted; 
and  even  a  few  monopoli(>s  in  industry  assisted  by 
a  great  one  in  transportation  would  mean  much  the 

same  thing. 

General  Economic  Principles  governing  Trans- 
portation. —  With  a  view  to  determining  the  bear- 
ing which  transportation  has  on  the  problem  of 
economic  freedom,  and  thus  on  the  prospect  <^f 
avoiding  the  alternative  of  state  socialism,  we  ntHxl 


\-i 


398 


ESSENTIALS   OP   ECONOMIC  THEORY 


ll" 


r . 


v-r 


to  state  tlie  essential  principles  in  the  theory  of 
railway  transportation. 

The  fact  that  makes  a  vast  amount  of  carrying 
necessary  is  that  agriculture  is  subject  to  a  law  of 
chnuni.shing   returns,    while    manufacture   obeys   an 
opposite  law.     In  tilling  the  soil  labor  and  capital 
yield  less  and  less  as  more  and  more  of  them  are 
used  in  a  given  area;    and  therefore  both  of  these 
agents  need  to  extend  themselves  widely  over  the 
land  in  order  to  use  it  economically.     In  the  produc- 
tion  of  staple  crops   which   can   be   freely  carried 
across  sea  and  continent,  the  natural  tendency  is 
to  scatter  a  rural  population  with  some  approach 
to   evenness   over  all   the  land   available  for  such 
crops.     Market    gardening    requires    less    land    per 
man  and  the  areas  devoted  to  it  are  much  more 
densely  peopled;    but  even  within  this  department 
of  agriculture  the  law  holds  true  that  too  much 
labor  and  capital  mu  -  not  be  bestowed  upon  an 
acre  of  ground.     In  a  general  way  agriculture  diffuses 
population,    while    manufacturing    concentrates    it. 
This  latter  work  is  done  most  economically  in  great 
establishments. 

The  Laio  of  Diminishing  Returns  from  Land  not 
restricted  to  that   used  in  Agriculture.  —  It   is   com- 
monly said  that  manufacturing  is  unlike  agriculture 
m  that  It  is  subject  to  a  law  of  increasing  returns- 
but  this  statement  is  true  only  when  its  terms  are 
carefully  interpreted.     The  diminishing  returns  from 
agriculture  and  the  increasing  returns  from  manufac- 
turing are  not  two  opposite  effects  from  the  same 
cause.     There  is,  indeed,  a  logical  anomaly  in  con- 
Jra.siing  M,<.m  with  each  other.    In  agriculture  we  get 
smaller  and  smaller  ivsults  per  unit  of  labor  and  capi- 


PRINCIPLES  OF   TRANSPORTATION 


3U9 


f    I 


tal  when  we  ov  -work  a  piece  of  ground  of  a  given  size 
by  putting  moie  and  more  labor  and  capital  on  it. 
The  trouble  here  is  that  land,  on  the  one  hand,  and 
labor  and  capital,  on  the  other,  are  not  combined 
in    advantageous    proportions;     and    exactly    the 
same  effect  is  produced  by  the  same;  cause  in  manu- 
facturing.    One   can   overtax   a   mill   site   by   con- 
fining larger  and  larger  amounts  of  capital  within 
a  given  area.     If  the  site  is  so  small  that  the  build- 
ing has  to  be  carried  far  into  the  air  and  supplied 
with  walls  strong  enough  to  resist  the  jar  of  machinery 
on  many  floors,  manufacturing  becomes  a  far  less 
economical  operation  than  it  would  l)e  if  the  site  were 
larger  and  the  mill  lower.     The  gain  from  centraliz- 
ing the  manufacturing  process  comes  in  part  from 
the  increased  size  of  the  particular  establishments; 
but  that  requires  that  every  part  of  the   plants, 
land  included,  should  be  increased.     As  the  whole 
of    an    establishment    becomes    larger    its    product 
becomes  cheaper;    but,   in   the  enlargement,   there 
should  be  no  undue  stinting  in  the  amount  of  land 
used.     In  both  agriculture  and  manufacturing,  t-hen, 
there  is  a  loss  of  productive  power  when  areas  of 
land    are    disproportionately    small,    as    compared 
with  amounts  of  labor  and  artificial  capital;    but 
in  the  realm  of  manufacturing  large  establishments 
under  single  entrepreneurs   combining  the  agents  of 
production  in  the  right  proportion  increase  the  pro- 
ductive  power  of   men   and   instrumenls  as  they  do 
not    in    agriculture.    Great    farms    show    no    such 
economy  as  great  mills. 

Basis  of  the  Law  of  Increasing  Returns  in  M."u- 
facturing.  —  There  would  be  some  increase  of  returns 
in  manufacturing  from  making  the  establis'-ments 


-i; 


400 


ESSENTIALS   OF   ECONOMIC   THEORY 


large  even  if  the  work  were  done  by  hand;  !        ,y  far 
the  greater  part  of  the  advantage  is  due  to  n    aiiiiery. 
The  invention  of  the  steam  engine  w&s  the  beginning 
of  it,  and  that  of  textile  machinery  afforded  a  quick 
continuation  of  the  revolutionary  change.     In  nearly 
all  lines  of  production,  outside  of  agriculture,  ma- 
chinery is  far  too  elaborate  to  be  used  in  household 
industry.    One  may  say  that  the  transformation  of 
the  world  into  one  enormous  farm  dotted  over  with 
great  workshops,   with  all  the  social  and  political 
changes  which  that  involves,  was  brewing  in  the  tea- 
kettle which  the  boy  Watt  is  said  to  have  watched, 
as  the  lid  was  raised  by  puffs  of  steam  and  the  pos- 
sibility  of   a   steam   engine   suggested   itself.    The 
mechanical  force  of  steam  began  at  once  to  centralize 
manufacturing.     That  made  increased  transporting 
necessary,  and  it  was  not  long  before  the  same  ele- 
ment, steam,  provided  the  means  of  this  extensive 
transportation.     It  is  necessary,  of  course,  to  carry 
the  products  of  the  farm  to  the  mill,  and  also  to  carry 
manufactured  goods  back  to  the  farm;   and  neither 
of  these  things  would  have  been  required  on  any  large 
scale  under  a  system  of  household  industry.    The 
economy  which  leads  to  this  lies  altogether  in  the 
greater  cheapness  of  the  manufacturing.    The  dif- 
ference between  the  co.st  of  fashioning  materials  in 
the  home  and  that  of  doing  it  in  the  mill  is  so  large 
that  It  would  have  brought  about  the  building  of 
mills  and  the  creation  of  manufacturing  centers  with 
the  carrying  which  it  involves,  if  neither  railroads 
nor  steamboats  had  come  into  being.    The  growth 
of  factory  villages  had  made  some  headway  at  a  time 
when  no  elaborate  machinery  existed;    but  if  that 
condition    had    continued,    manufacturing    centera 


PRINCIPLES   OF  TRANSPORTATION 


401 


would  have  been  smaller,  more  numerous,  and  more 
scattered  than  they  have  been.    It  is  the  cheapness 
of  carrying  by  railroads  and  steamships  which  has 
made  it  possible  to  get  the  fullest  benefit  from  the 
so-called  law  of  increasing  returns  in  manufacturing. 
Mining  as  related  to  Transportation.  —  Mining  is 
a  process  which  has  to  be  local,  because  ores  and  coal 
are  furnished  by  nature  in  a  local  way;    and  one 
might  mention  this  as  a  second  cause  of  extensive 
transportation.    A  great  part  of  the  carrying  so  oc- 
casioned depends,  indeed,  on  the  growth  of  the  manu- 
facturing centers,  since  mills  and  furnaces  need  great 
quantities  of  fuel.    A  means  of  heating  private  dwel- 
lings, of  cooking  food,  etc.,  might  conceivably  be 
supplied  in  a  local  way,  by  the  growth  of  forests ;  but 
the  fuel  needed  for  the  centers  of  manufacturing  and 
commerce  has  to  come  from  distant  points.    The 
law  of  increasing  returns  in  manufacturing,  then,  and 
natural  location  of  mines  are  the  most  generic  causes 
of  transportation.    The  system  which  has  resulted 
gives  to  everybody  more  and  better  food,  as  well  as 
more  and  better  goods  of  every  kind,  than  he  could 
possibly  have  had  if  the  primitive  system  of  local 
manufacturing  had  continued.    The  cheapness  with 
which  form  utility  is  created  in  the  mill  and  place 
utility  on  the  railroad  are  the  two  causcD  which  a''e  at 
work. 

The  Rivalry  betioeen  Producers  of  Form  Utility  and 
Producers  of  Form  and  Place  Utilities.  —  In  the  tech- 
nical language  of  economics,  there  has  been  a  contest 
in  efficiency  between  that  creating  of  form  utility 
which  is  done  when  goods  are  made  in  households  or 
in  ismaii  villages,  and  ihal  jt)iiiL  process  of  creating 
form  and  place  utility  which  consists  in  making  goods 

2d 


•     3 


um\ 


402 


ESSENTIALS   OF   ECONOMIC   THEORY 


I      .f 


f* 


I       'ft- 


at  central  points  and  carrying  them  to  the  widely 
scattered  homes  of  consumers.  The  latter  process, 
involving  as  it  does  the  necessity  of  creating  two 
utilities  instead  of  one,  is  now  by  far  the  cheaper. 

The  Ultimate  Limit  of  Charges  for  Transportation.  — 
Charges  for  transportation  have  as  one  extreme  limit 
the  difference  betwe(>n  the  cost  of  making  goods  at 
one  point  and  the  cost  of  making  them  at  another. 
This  rule  is  applicable,  of  course,  only  to  those 
numerous  cases  in  which  it  is  physically  possible  to 
create  the  goods  at  both  points.  If  they  can  be  made 
at  point  A  for  ten  dollars,  by  using  five  days'  labor, 
and  at  point  B  for  twenty  dollars,  by  using  ten  days' 
labor,  ten  dollars  would  furnish  the  extreme  limit  of 
a  possible  charge  for  carrying  them  from  A  to  B,  In 
a  certain  number  of  cases  the  actual  charge  approxi- 
mates this  extreme  limit.  With  a  mill  in  A,  work- 
ing with  much  economy,  and  a  number  of  household 
workshops  in  B  producing  with  less  economy,  the  prod- 
uct of  the  large  mill  may  invade  the  territory  sup- 
plied by  the  little  workshops,  and  the  carrier  may 
receive  in  return  for  transportation  about  as  much  as 
the  difference  between  the  two  costs  of  production. 
With  a  great  mill  at  A  and  a  small  one  at  B,  the  same 
th.  ig  may  happen. 

Narrower  Limits  usually  Applicable.  —  In  by  far 
the  larger  number  of  cases  such  a  difference  between 
costs  is  more  than  the  carrier  can  get.  Usually 
there  is  some  alternative  mode  of  procuring  goods  at 
B  which  does  not  involve  actually  making  them  on 
the  spot  at  a  serious  disadvantage.  It  may  be 
possible  to  convey  them  to  B  from  a  third  locality,  C, 
where  they  are  made  in  an  advantageous  way.  If 
this  carrying  is  tlone  by  some  process  in  which  com- 


PRINCIPLES  OF  TRANSPORTATION 


403 


C 

Vul  >• 

2  *  - 

t  13  < 

h;  « 

ii| 

-B 


petition  rules,  — if,  for  instance,  C  is  not  far  from  B, 
so  that  goods  can  bo  carried  thither  by  drays,  —  the  cost 
of  making  the  goods  in  C  plus  the  natural  or  competi- 
tive cost  of  conveying  them  to  B  will  together  make 
up  the  naturd  cost 
of  procuring  them  in 
this  latter  locality. 
The   difference   be- 
tween that  and  the  ^ 
cost  of  making  them  in  the  great  center  which  we 
have  called  A  will  constitute  the  limit  of  the  freight 
charge  from  that  city  to  B ;  and  even  though  between 
these  two  points  the  carrier  has  a  monopoly  of  the 
traffic,  he  can  get  no  more.' 

Other  Applications  of  the  Same  Rule.  —  This  rule 
applies    even    where    goods    made    in    C    have    to 
be    carried    great   distances,  provided   the  carrying 
is  done   in  some  competitive  way,   at    a  low  rate 
Ijased    on    co>t.     Consumers    in   B   may  have   the 
option   of    bringing  the  goods  by  water,  along  the 
coast   or   across  an   ocean,   at    a  rate  that   makes 
the  cost  of    procuring  them  at  B  not  much  above 
the  cost  of  making  them  at  A.     If  so,  this  small 
difference   of  costs   represents   all   that   any  carrier 
can  get  for  moving  them  from  A  to  .1,  and  though 
this  carrying  may  be  done  by  a  railroad  which  has 
a  monopoly  of  its  route,  its  service  will  command 
no  higher  rate  than  the  one  which  is  thus  naturally 
set  for  it.    The  rate  is  governed  by  costs,  though  not 
by  costs  incurred  by  the  railroad.     Whenever  com- 
petition rules,  the  returns  for  any  productive  function 

'  For  a  case  in  which  a  railroad  can  get  the  entire  difference 
between  the  cost  of  goods  at  tiie  point  tioiu  ^vhiuh  it  carries 
them  and  their  cost  at  the  place  of  deli'-ery,  but  voluntarily 
refrains  from  doing  so,  see  the  note  at  the  end  of  this  chapter. 


i     » 

!  'J 

1-1 


i- 1 


'i 


%\ 


404 


ESSENTIALS   OP   ECONOMIC  THEORY 


tend  to  conform  to  casts,  antl  we  here  suppose  that  it 
does  so  rule  (1)  in  the  making  of  goods  at  A,  and  (2)  in 
the  procuring  of  the  goods  by  some  alternative  method 
at  B.  The  difference  Ixitween  these  costs  sets  the 
maximum  limit  of  the  freight  charge  between  A  and  B, 
and  this  may  exceed  the  cost  of  this  service  and  leave 
a  profit  for  the  carrier  who  uses  this  route. 

Freight   Charges  and   Value.— The  return   for  a 
productive    operation    of    any    kind    whatsoever   is 
directly  based  on  the  value  which  it  imparts  to  some- 
thing; and  in  the  case  of  carrying,  the  value  is  meas- 
ured by  the  amount  of  "place  utility"  which  the 
carrying  creates.     This  is  merely  one  application  of  a 
universal   law.    What  the  goods  are   worth   where 
they  are  consumed,  less  what  they  are  worth  where 
they  are  made,  equals  what  can  be  had  for  moving 
them   from   the  one   point  to   the  other.     Freight 
charges  are  gauged  by  the  principle  of  "value  of 
service,"  but  so  also  are  the  charges  for  making  tlu; 
goods.    When  things  are  produced  and  used  at  the 
same  place,  the  producer's  returns  equal  the  value  of 
his  product,  and  this  is  fixed  by  the  principle  of  final 
utility.    It  is,  however,  a  truism  of  economics  that 
this  value  itself  tends  under  competition  to  conform 
to  the  cost  of  creating  it.    In  our  illustration  the 
manufacturing  returns  are  fixed  by  the  value  of  ser- 
vice and  also  by  the  cost  of  service,  and  so  are  the 
returns  for  transporting  the  goods  Vom  C  to  B;   but 
the  returns  for  carrying  them  from  A  to  B,  whero 
monopoly  prevails,  are  not  governed  by  the  cost  of 
service  but  by  costs  elsewhere  incurred. 

Freight  Charges  and  Cost.  —  The  law  of  costs  as 
well  as  the  law  of  value  holds  gocd,  in  general,  in 
connection  with  transportation.    Competition  in  this 


PRINCIPLKS   OF   TRANSl'ORTATION 


405 


A'" 
A" 
A' 
A 


department  tends  to  bring  values  created  t^^  a  cer- 
tain equality  per  unit  of  cost  and  to  reward  the  labor 
and  capital  which  are  used  in  carrying  as  well  as  they 
are  rewarded  elsewhere,  and  not  better.  If  our  table 
of  industrial  groups  were  elaboratetl,  there  would  be 
between  A  and  A',  as  well  as  Ix'tween  A'  and  A",  and 
between  adjacent  subgroups  throughout  the 
chart,  a  symbol  which  should  represent  the 
work  done  by  the  carrier ;  and  the  fact  would 
appear  that  naturally  this  work  is  neither 
favored  nor  injured  in  the  apportionment  of 
rewards.  Free  competition,  if  it  existed  in  perfection 
everywhere,  would  be  a  perfectly  undiscriminating 
distributor  of  earnings,  and  would  apportion  all  re- 
turns accortling  to  costs. 

Variations  of  Freight  Charges  from  Static  Standards. 
—  Place  values  arc  not  an  exception  to  the  general 
rule  of  value ;  and  yet  freight  charges  actually  remain 
at  a  greater  distance  from  the  standards  furnished  by 
the  direct  costs  of  carrying  than  do  the  returns  for 
other  services  from  corresponding  standards.  There 
is  an  approach  to  monopoly  in  this  department,  and, 
when  direct  compc  ion  exists,  it  is  a  more  imperfect 
process  here  than  it  is  elsewhere.  Moreover,  the 
costs  whicii  here  figure  as  an  element  in  the  adjust- 
ment of  freight  charges  are  of  a  peculiar  kind,  which, 
although  not  unknown  in  other  departments  of 
production,  have  nowhere  else  so  great  influence  and 
importance.  The  stutly  of  railroads  and  their 
charges  is  baffling,  not  becaus  •  the  economic  forces 
do  not  here  work  at  all,  but  because  here  they  en- 
counter a  resistance  which  is  exceptionally  strong  and 
persistent.  The  quasi-monopoly  which  elsewhere  con- 
tinues only  briefly  lasts  long  in  this  department  of 


1 


406 


ESSENTIALS   OF   ECONOMIC   THEOTIY 


production;    but  it  is  subject  to  the  same  principles 
which  everywhere  rule. 

The  M(xie.s  of  Approaching  the  Study  of  Freight 
Charges.  —  In  studying  freight  charges  we  may,  if  we 
choose,  start  with  the  intricate  tariffs  of  railroads,  a-; 
they  now  stand,  and  try  to  fi'-tl  some  principle  which, 
if  applied,  would  bring  order  out  of  the  mass  of  capri- 
cious and  inconsistent  rates.  Such  a  rule  will  ulti- 
mately be  needed,  but  it  can  best  be  obtained  l)y 
examining  at  the  outset  the  transportation  which  is 
done  by  simple  means  and  under  active  competition. 
It  will  be  found  (1)  that  basic  principles  apply  to  all 
transportation  whether  it  be  by  railroad  or  by  siinpler 
means;  (2)  that  in  the  early  development  of  every 
system  of  common  carrying  the  action  of  these  prin- 
cii)les  =  -■  disturbed ;  {',)  that  in  the  case  of  the  more 
primitiv  i  •systems  the  disturbances  are  soon  overcome, 
but  that  they  continue  longer  and  produce  far  greater 
effects  in  the  case  of  railroads;  (4)  that  one  impor- 
tant influence  of  this  kind  tends  naturally  to  disap- 
pear, while  another  continues  and  calls  for  regulation 
by  the  state;  and  (5)  that  this  regulation  needs  to  Ik; 
based  on  natural  tendencies  and  to  conform  to  the 
laws  which,  when  competition  rules,  govern  the  returns 
of  all  classes  of  proflucers. 

A  Typical  Instance  of  Partial  Monopoly  in  Trans- 
portation. —  We  may  now  trace  the  development  out 
of  a  purely  competitive  condition  of  a  simple  instance 
of  what  is  usually  termed  monopoly,  though  in  a  rigor- 
ous use  of  terms  it  can  hardly  be  so  called.  It  is  a 
monopoly  the  power  of  which  is  limitetl.  So  long  as 
goods  made  at  A  are  carried  to  B  by  some  primitive 
method  which  insures  the  presence  of  competing  car- 
riers, the  returns  for  carrying  will  tend  only  to  cover 


PRINCIPLES    OF   TRANSPORTATION 


407 


costs.  By  a  normal  adjustment  the  price  of  the 
goods  at  A  only  repays  the  costs  of  making  them, 
and  if  these  and  the  carrying  charge  amount  to  less 
than  the  costs  of  making  the  goods  at  C  and  trans- 
porting them  to  B,  none  of  them  will  come  t.)  B  m 
this  latter  way.  Makers  at  A  and  carriers  on  the 
route  .om  there  to  B  will  possess  the  market,  and  the 
place  value  which  the  goods  acciuire  when  taken  to  B 
will  be  fixed  directly  by  the  costs  of  carrying. 

It  is  when  there  is  no  effective  competition  on  the 
route  between  A  and  B,  while  there  is  free  competi- 
tion in  making  the  goods  both  at  A  and  at  C,  and  also 
in  carrying  them  from  C  to  B,  that  a  typical  case  of  a 
partial  monopoly  is  presented. 

The  price  of  the  goods  at  A  is  a  definite  amount 
fixed  by  competi-  ^ 

tion  between  pro- 
ducers, and  the 
price  at  B  is  also 
a  definite  amount 


0.  3 


A>- 


->B 


MONOPOLISTIC  CARRVINQ 


fixed  by  competi- 
tion between  different    makers  at  C  and  between 
different  carriers  between  C  and  B.    The  difference 
between  these  amounts  sets  the  limit  of  the  charge 
for  carrying  from  A  to  B ;  but  in  that  operation  there 
is,  for  a  brief  period,  no  effective  competition.     For 
simplicity  let  us  say  that  this  carrying  is  at  first  done 
by  a  single  wagon  owned  by  its  driver,  and  that  his 
charge  for  the  service  he  renders  nearly  equals  the 
difference  between  the  cost  of  making  the  goods  at  A 
and  that  of  obtaining  them  at  B  from  some  alternative 
source.     This  lone  and  honest  driver  is  thus  illustrat- 
ing the  practice  of  the  modern  railroad,  in  that  he  is 
"charging  what  the  traffic  wUl  bear."    The  goods  he 


u 

I       r 

-I 


408 


ESSENTIALS   OF  ECONOMIC  THEORY 


transports  havo  one  natural  value  at  A  and  another  at 
B.  These  two  values  are  determined  separately  and 
m  ways  that  are  quite  independent  of  the  carrier  and 
his  policy.  When  he  begins  to  do  his  work,  he  charges 
an  amount  which  about  equals  the  difference  between 
the  two  values. 

The  Impossibility  of  Long-cmtinued  Profits  in  the 
Case  of  Primitive  Carriers.  -  With  the  growth  of 
traffic  direct  competition  will  soon  appear.    A  second 
wagon  will  Ijc  put  on  the  route  and  then  more  and 
the  stnfe  for  freight  will   bring  down  the  charges 
to  the  level  of  cost.     For  a  brief  season  a  favored 
drayman  was  able  to  get  nearly  the  entire  difference 
between  the  value  of  the  goods  at  the  point  where 
they  are  made  and  their  value  at  the  point  where 
they  are  used,  as  these  two  values  were  determined  by 
independent  causes  with  which  he  had  nothing  to  do 
Now,  he  and  his  rivals  can,  indeed,  get  the  difference 
between  the  value  of  the  good^  at  the  one  point  and 
their  value  at  the  other;   but  this  difference  is  now 
directly  determined  by  the  carrying  charge.    That 
charge,  again,  is  determined  by  the  cost  of  rendering 
the  service.    There  was  a  brief  interval  when  the  value 
o.  the  service  and  the  cost  of  it  were  different  amounts  • 
but  now  they  coincide.    We  shall  see  that  the  essen- 
tial difference  between  carrying  by  primitive  means 
and  carrying  by  railroad  is  in  the  fact  that  in  the 
latter  case  the  period  when  value  and  cost  are  differ- 
ent is  greatly  prolonged. 

The  Appearance  of  a  More  Efficient  Competitor  — 
With  the  growth  of  traffic  a  sailing  vessel  comes  into 
use  on  a  route  connecting  A  with  B,  and  the  cost  of 
thus  conveying  goods  is  less  than  that  of  conveying 
them  over  the  roadway.    The  charge  made  by  the 


PRINCIPLES   OF  TRANSPOFTATION 


409 


sailing  vessel  is  lower  than  that  made  by  the  teamsters, 
and  the  goods  are  thas  deHvered  at  B  eheaply  enough 
both  to  attract  to  the  water  route  all  carrying  from 
A  and  to  put  an  end  to  all  carrying  from  C.  Th(>  for- 
mei  carriers  be- 


C 

if' 

a* 


Ar 


AlANOONte  noun 


WATER  ROUTK  UUD 


tween  B  and  C 
lose  their  busi- 
ness, and  the 
makers  at  C  lose 
some  part  of 
theirs,  in  the 
same  way  that 
any  proflucer  loses  the  traffic  when  he  is  underbid 
by  rivals.  The  public  is  the  gainer  to  the  extent  of 
the  reduction  which  takes  place  in  the  cost  of  the 
goods  as  delivenni  to  consuni(>rs  in  the  market  at  B ; 
nevertheless,  the  situation  still  involves  a  limited 
monopoly.  The  sailing  vessel  now  has  no  effective 
nval,  and  can  charge  "what  the  traffic  wall  bear," 
and  that  is  very  nearly  the  cost  of  conveying  the  goods 
by  wagons.  The  advent  of  the  vessel  has  benefited 
the  public;  yet  it  is  regarded  as  constituting  a  new 
monopoly,  and  the  benefit  which  the  public  gets  is 
l««?s  than  it  will  get  when  a  really  effective  competitor 
ni  tbv  sailing  craft  makes  its  appearance. 

A  i^ncijme  iioveming  Charges  by  Unequal  Com- 
rmtsmt'  —  "~hf  principle  which,  in  this  instance, 
3^®sss  h*  freight  charges  is  one  which  is  active  in 
sL  .sssartTnenis  of  production.  We  have  seen  that 
a  ma^^  ii  roods  who  has  just  acquired  a  monopoly 
fi  u;  i?ttwrwi-  method  may,  for  a  time,  charge  what  the 
:SHHffi5  '5s^  as  niacie  i)y  inferior  processes,  if  the 
lUEisai'tiaTPr  aaK  some  patented  machinery  which 
"ffwrK:  i  p-eat  economy,  he  is  not  at  once  obliged  to 


'A 


.5* 


410 


ESSENTIALS  OF  ECONOMIC  THEORY 


govern  his  prices  by  what  the  goods  cost  w  his  own 
mill,  but  may  charg  about  what  they  would  cost  if 
they  were  made  by  the  inferior  machinery  which  he 
formerly  used.  This  is  what  they  still  cost  in  the 
mills  of  certain  rivals,  and  it  tlius  appears  that  com- 
petition of  a  sort  fixes  his  price  for  the  goods  he  creates, 
but  it  is  the  competition  of  less  capable  producers  and 
fails  to  benefit  the  public  as  the  rivalry  of  equals 
would  do.  If  there  is  evil  in  such  a  monopoly  as 
this,  it  is  not  t)ecause  the  public  is  injured  by  the 
advent  of  the  cheaper  method.  The  improvement 
usually  begins  to  confer  benefit  on  consumers  at  the 
moment  of  its  arrival,  through  the  effort  of  the  effi- 
cient producer  to  secure  traffic.  It  causes  the  prices 
to  go  down,  though  the  fall  is  at  first  only  a  slight  one, 
and  the  consumer's  case  against  the  monopoly  of 
method  is  on  the  ground  of  his  failure  to  receive  a 
further  benefit.  He  will  get  that  further  benefit  when- 
ever a  producer  who  can  compete  on  even  terms  with 
the  one  who  now  commands  the  field  shall  make  his 
appearance. 

Unequal  Competition  Typical  of  Carries.  —  Our 
recent  illustration  represents  a  similar  condition  in 
carrying.  The  public  gets  a  slight  gain  from  the  ad- 
vent of  a  sailing  vessel ;  but  it  fails  to  get  the  fur- 
ther benefit  that  the  advent  of  a  second  vessel  will 
ultimately  bring.  For  a  time  the  freight  charge 
stands  nearly  at  what  teamsters  have  charged.  For 
cheaper  rates  the  public  must  wait  for  the  advent  of 
another  vessel. 

The  Cause  of  the  Partial  Monopoly  in  Carrying.  — 
There  is  nothing  to  prevent  a  second  schooner  from 
being  put  on  this  route,  if  the  returns  to  be  expected 
should  warrant  it.    At  the  outset  the  new  vessel 


PRINCIPLES  OF  TRANSPORTATION 


411 


n"i 


would  get  only  about  a  half  of  the  amount  of  traffic 
enjoyed  by  the  first,  and  the  rates  would  probably  be 
reduced  by  the  competition  between  the  two.    Until 
the  returns  of  the  first  vessel  become  large  it  has  no 
rivalry  to  fear,  but  it  is  clear  that  its  monopoly  is  held 
by  a  very  precarious  tenure.     It  is  not  likely  long 
to  enjoy  the  benefit  of  any  charges  which  yield  much 
profit.    The  growth  of  traffic  will  in  due  time  bring 
the  competing  vessel,  and  the  rule  of  returns  that 
only  cover  costs  will  again  assert  itself.    The  owner 
of  the  first  sailing  craft  has  been  able  for  a  time  to 
charge  "the  value  of  the  service"  he  has  rendered,  as 
that  value  was  determined  independently  of  his  own 
action ;  but  now  this  value  itself  depends  on  his  action 
and  that  of  rival  carriers  using  the  same  route,  and  it 
adjusts  itself  at  the  level  of  cost. 

The  Effect  of  partly  Unused  Vessels  for  Carrying.  — 
The  case  illustrates  another  principle  which  is  equally 
general.    The  entrepreneur  whose  capacity  for  pro- 
ducing is  only  partially  utilized  may  often  take  some 
orders  at  less  than  it  costs  to  fill  them,  as  cost  is  usu- 
ally understood,  and  he  will  still  be  the  gainer.     In 
manufacturing  as  well  as  in  carrying  there  are  "  fixed 
charges";    there  are  costs  which  stand  at  a  defi- 
nite amount  which  is  independent  of  the  volume  of 
traffic,  while  other  costs  increase  as  the  volume  grows. 
These  are  the  "variable  costs,"  and  they  have  to  be 
further  classified,  since  some  of  them  do  not  increase 
as  rapidly  as  the  business  grows,  while  others  increase 
with  the  sam'^  rapidity  as  does  the  business.    The 
makers  of  sewing  machines,  typewriters,  reapers,  and 
mowers,  and  indeed  machinery  generally,  can  usually 
increase  their  product  without  correspondingly  in- 
creasing their  outlay.    They  can  make  goods  and  sell 


11^  • 


IJ-; 


111 


li^-,^. 


412 


ESSENTIALS  OF  ECONOMIC  THEORY 


them   in  a  foreign  market  at  rates  which  would 
injure  and  might  even  ruin  them  if  they  were  applied 
to  the  sales  made  in  their  own  country.    This  fact 
is  most  obvious  when  the  manufacturer's  machinery 
IS  not  all  kept  running  or  when  it  all  runs  only  a  part 
of  the  time.    Increasing  the  output  is  then  a  par- 
ticularly cheap  operation.    When  a  carrier's  facilities 
are  partially  unused  -  when  a  ship  carries  a  cargo 
m  one  direction  and  returns  in  ballast,  or  when  it 
sails  on  both  trips  with  its  hold  only  half  full  —  it  is 
ready  to  carry  additional  goods  at  a  low  rate  pro- 
vided that  this  policy  will  not  demoralize  its  existing 
business.    In  our  illustration  we  have  assumed  that 
some  merchandise  is  made  at  A  and  consumed  at  B 
but  it  may  well  be  that  goods  of  some  sort  are  pro^ 
duced  at  B  and  consumed  at  A.    There  may  be  stone 
quarries  at  B  and  there  may  be  need  of  stone  for 
paving  or  building  at  A,  and  the  vessel  may  carry  a 
return  cargo  of  this  kind  at  any  rate  which  does  not 
greatly  exceed  the  mere  cost  of  loading  and  unloading 
It  and  be  better  off  for  so  doing.    If  the  entire  differ- 
ence between  the  cost  of  the  stone  at  B  and  the  cost 
of  producing  it  at  A  from  some  other  source  is  a  very 
slight  one,  the  amount  of  it  still  represents  all  that  the 
ship  can  get  for  carrying  the  stone.    The  utmost  that 
the  traffic  will  bear  is  this  difference  in  costs;  and  yet 
the  business  will  be  accepted,  for  the  return  exceeds 
the  merely  variable  costs  which  it  entails.    The  fixed 
charges,  the  interest  on  the  cost  of  the  vessel,  and  the 
outlay  for  maintaining  it  do  not  need  to  be  paid  in 
any  part  from  the  returns  of  thi,'  extra  business. 
They  are  already  provided  for. 

If  instead  of  returning  from  B  with  a  hold  quite 
empty,  the  vessel  made  both  voyages  with  a  hold  only 


«?-:♦♦<- 


PRINCIPLES  OF  TRANSPORTATION 


413 


half  full,  the  result  would  be  similar.  It  would  then 
be  in  a  position  to  make  a  low  bid  for  further  freight 
in  both  directions.  If  this  entails  no  cutting  of  the 
rates  for  carrying  the  original  goods,  the  vessel  can 
take  further  goods  with  advantage  at  any  rate  above 
the  merely  variable  costs. 

Production  which  is  Advantageous  though  it  does  not 
repay  all  Costs.  —  There  are  two  general  conditions 
under  which  it  is  advantageous,  both  in  making  goods 
and  in  carrying  them,  to  extend  production,  though 
the  further  returns  which  are  in  this  way  gained  do 
not  cover  all  costs.  First,  the  producer  must  have 
an  unused  capacity  for  making  or  carrying  goods.  In 
such  a  case  it  is  possible  to  make  or  carry  an  increment 
of  goods  without  entailing  on  himself  an  increment  of 
cost  that  is  proportionate  to  the  amount  carried.  In 
his  bookkeeping  his  original  business  is  charged  with 
costs  amounting  to  a  certain  sum  per  unit  of  goods 
produced  or  carried.  His  further  business  is  charged 
with  a  smaller  outlay  per  unit. 

Secondly,  it  must  be  possible  to  demand  separate 
and  independent  returns  for  the  different  increments 
of  goods,  so  that  cutting  the  rate  charged  for  one  part 
of  the  traffic  does  not  entail  cutting  the  rate  charged 
for  the  other.  In  the  case  of  a  manufacturer  this  is 
secured,  either  by  carrying  some  goods  to  a  remote  and 
entirely  independent  market,  or  by  producing  some 
new  kind  of  goods  the  low  price  of  which  will  have  no 
effect  on  the  sales  or  the  prices  of  the  other  kinds. 
In  the  case  of  the  carrier  it  is  accomplished  in  a  vari- 
ety of  similar  ways.  He  can  take  return  cargoes  at 
a  low  rate.  If  he  stops  at  different  ports  along  his 
route  he  can  charge  less  for  goods  landed  at  certain 
ports  than  for  those  landed  at  others.   He  can  classify 


■  {      . 


te. 


('  it  >, 


414 


ESSENTIALS  OP  ECONOMIC  THEORY 


his  freight  and  cany  some  of  it  at  a  rate  at  which  he 
could  not  afford  to  carry  the  whole.  With  the  growth 
of  traffic,  however,  this  condition  tends  to  disappear. 
Its  existence  requires  that  the  carrier  should  have 
facilities  only  partially  used.  As  the  ship  acquires 
fuller  and  fuller  cargoes,  it  ceases  to  be  advantageous 
to  fill  the  hold  with  goods  which  pay  lower  rates  than 
others;  just  as  a  mill,  which  may  have  run  for  a  time 
partly  on  goods  that  yield  a  large  return  and  partly 
on  those  which  yield  a  small  one,  gradually  discards 
the  making  of  the  ohepper  goods  as  the  demand  for 
the  dearer  kind  increases.  The  vessel  which  can  get 
full  cargoes  of  profitable  merchandise  will  cease  to 
devote  any  space  to  what  is  less  profitable.  In  the 
end  the  ship  in  our  illustration  will  be  transporting  in 
both  directions  all  the  first-class  freight  it  can  take, 
and  will  accept  neither  the  stone  nor  the  merchandise 
consigned  to  ports  to  which  it  can  be  carried  only  at 
the  cheap  rates. 

Result  of  Effective  Competition  throughout  the  Car- 
rier's Route.  —  The  condition  just  described  —  that 
of  full  cargoes  of  profitable  goods  —  inevitably  at- 
tracts a  rival  vessel,  and  the  ordinary  effects  of  com- 
petition then  begin  to  show  themselves.  The  vessels 
pursue  the  same  route,  cater  to  the  same  traffic,  and 
if  they  try  to  get  business  from  each  other,  bring  down 
their  charges.  The  warfare  may  even  bring  them  to 
reduce  the  rates  to  the  level  at  which  only  variable 
costs  are  covered  — a  policy  that,  if  persisted  in, 
would  bankrupt  them  both;  and  here,  as  well  as  in 
the  case  of  railroads,  there  is  a  powerful  motive  for 
combining  and  ending  the  war.  It  usually  causes 
a  merely  ta^it  agreement  to  "live  and  let  live"  — a 
concurrent  refraining  from  the  fatal  extreme  of  com- 


PRINCIPLES   OF  TRANSPORTATION 


415 


petition.     The    reductions,    as    made,    have   to  be 
general  and  to  apply  to  all  parts  of  the  traffic,  and 
unless  each  part  of  the  freight  carried  earns  a  pro 
rata  share  of  the  fixed  charges  incurred  in  the  business, 
the  traffic  is  carried  at  a  loss.     On  the  supposition 
which  we  have  macle  —  that  the  special  and  compara- 
tively unprofitable  increment  of  carrying  was  dis- 
continued as  soon  as  the  first  vessel  could  use  its 
entire  cargo  space  in  transporting  goods  of  a  high 
class  —  the  arrival  of  the  second  vessel  may  cause  the 
less  profitable  carrying  to  be  resumed,  since  there  will 
not  be  enough  of  the  better  sort  to  afTord  two  full 
cargoes.     Moreover,  a  normal  kind  of  competition 
will  btop  short  of  the  warfare  which  drives  both  rivals 
into  bankruptcy,  and  will  leave  the  rates  at  a  level 
at  which  the  receipts  of  each  carrier  cover  all  his 
outlays.' 

•  A  full  discussion  of  the  limits  of  freight  charges  would 
take  account  of  the  fact  that  "what  the  traffic  will  bear"  is 
an  elastic  amount.  An  infant  industry  will  beai  less  than 
a  mature  one;  and  moreover,  a  rate  that  it  will  bear  without 
being  taxed  out  of  existence  may  be  sufficient  to  stunt  its 
growth.  A  railroad  may  be  interested  in  hastening  its  growth. 
When  goods  have  one  cost  at  A  and  another  at  B,  a  railroad 
company  may  carry  them  from  the  one  point  to  the  other 
for  less  than  the  difference  between  the  costs  because  it  wishes 
the  industry  at  A  to  grow  and  furnish  freight.  Farmers 
who  are  introducing  a  new  crop  in  a  section  of  country  re- 
mote from  a  market  may  be  encouraged  by  a  rate  for  carry- 
ing which  leaves  them  a  margin  of  profit.  It  is  when  a  branch 
of  production  has  more  nearly  reached  its  natural  dimen- 
sions that  the  charge  for  carrying  its  product  tends  to  ap- 
proach its  highest  limit. 


; :  ■ 


Ir 


i- 


hi 

■  i 


<  r  #,  - 


I  HI 

I 


111 


III 

If 


CHAPTER  XXIV 

IBE   FOREGOING    PRINCIPLES   APPLIED   TO   THE 
RAILROAD   PROBLEM 

Simple  Cases  of  Charging  "  What  the  Traffic  mil 
Bear."  —  The  value  of  a  study  of  primitive  carriers 
and  their  policy  lies  in  the  fact  that  it  illustrates 
principles  which  apply  to  transportation  by  a  com- 
plicated system  of  railroads,  although  in  this  latter 
case  they  are  not  easily  discerned.  Imperfect  com- 
petition is  what  exists  in  the  department  of  carrying. 
So  long  as  a  railroad  is  without  any  rival  it  may,  in 
some  cases,  charge  for  moving  goods  from  one  point 
to  another  about  as  much  as  the  cost  of  making  them 
at  the  latter  point  exceeds  the  cost  at  the  former. 
This  is  the  simplest  case  of  charging  what  the  traffic 
will  bear.  Or,  again,  the  situation  may  be  dominated 
by  producers  at  a  third  point  who  can  make  goods  and 
get  them  carried  to  the  place  we  may  term  the  mar- 
ket for  less  than  the  cost  of  making  them  directly  in 
this  latter  place.  In  such  a  case  the  road  may  de- 
mand nearly  the  amount  by  which  the  cost  of  making 
the  goods  at  an  accessible  third  point  and  moving  them 
to  the  one  which  is  their  market  exceeds  the  cost  of 
making  them  in  the  place  first  named ;  and  this  is  a 
slightly  less  simple  case  of  charging  what  the  traffic 
will  bear.  It  is  appropriating  the  difference  be- 
tween two  natural  values  neither  of  which  the  rail- 
road itself  fixes. 

Charges  based  on   Various   Kinds   of  Cost.  —  The 

4id 


THE  RAILROAD   PROBLEM 


417 


charges  of  the  railroad  may  be  limited  by  the  com- 
petition of  inferior  carriers  who  use  its  own  route, 
such  as  teamsters  whose  wagons  use  a  public  high- 
way running  parallel  to  its  own  track.    Here  charges 
are  based  on  costs,  but  not  on  those  which  the  rail- 
road incurs.    They  are  the  costs  which  the  team- 
sters incur;  and  if  the  railroad  has  much  business,  its 
own  costs  are  less  and  it  makes  a  profit.    The  charges 
may  be  based  on  costs  incurred  by  more  economical 
carriers,  like  owners  of  ships,  and  in  such  a  case  the  rate 
which  the  railroad  can  get  may  be  less  than  its  ov/n 
costs,  if  these  are  figured  in  the  simple  way  of  dividing 
a  total  outlay  by  a  total  number  of  units  of  freight 
transported.     The  rate  is  based  on  the  shipowners' 
costs,  and  these  are  so  low  as  to  bankrupt  the  railroad 
if  it  should  reduce  all  its  charges  to  such  a  level.    It 
reduces  them  thus  only  on  the  particular  route  where 
competition  by  water  is  encountered,  and  keeps  them 
elsewhere  at  the  higher  level.    In  the  case  of  ship- 
ments by  rail  over  such  routes  "  what  the  traffic  will 
bear"  is  determined  by  the  low  charges  established 
by  the  ships;   and  this  means  that  it  is  determined 
by  a  certain  definite  cost  of  carrying  goods  between 
the  very  points  which  the  railroad  connects. 

The  Exceptional  Importance  of  Fixed  Charges  in 
the  Case  of  Railroads. —The  railroad,  in  the  case  just 
noticed,  carries  its  rates  below  costs,  as  these  are  com- 
puted in  a  simple  way,  but  keeps  the  lowest  of  them 
somewhat  above  the  variable  costs  which  we  have 
defined;  and  there  appears  the  important  fact  that 
the  fixed  costs  incurred  by  the  railroad  form  an  un- 
precedentedly  large  part  of  its  total  expenses.  The 
interest  on  the  outlay  it  makes  for  roadbed,  track, 
bridges,   tunnels,  terminals,   etc.,   is  something   for 

2u 


ir 


'U. 


f 


If 


fcS%'Tv.;-:_-V. 


i?. 


418 


ESSENTIALS  OF  ECONOMIC  THEORY 


which  there  is  no  fair  parallel  in  the  case  of  wagons  or 
ships.  This  is  the  first  unique  fact  concerning  rail- 
roads and  their  policy ;  and  the  second  is  that  they 
continue  very  long  in  that  intermediate  state  which 
we  have  illustrated  by  the  ship  which  had  only  a  par- 
tial cargo  and  was  impelled  to  take  some  traffic  at  a 
special  and  low  rate.  For  many  years  the  railroad 
only  partially  utilizes  its  plant;  and  so  long  as  that 
is  the  case  its  natural  policy  is  one  of  drastic  dis- 
criminai.  n  between  different  portions  of  its  business. 
A  third  great  point  of  difference  between  the  rail- 
road and  other  carriers  appears  if,  while  its  capacity 
is  still  only  partially  utilized,  it  encounters  the  direct 
rivalry  of  other  railroads  that  are  eager  for  business ; 
competition  then  takes  a  shape  which  impels  the  par- 
ticipants irresistibly  into  some  kind  of  combination. 
The  union  may  be  tacit  or  formal,  and  it  may  depend 
on  personal  relations  or  on  some  merging  of  corpora- 
tions ;  but  toward  something  that  will  make  the  rival 
lines  act  concurrently  and  with  mutual  toleration  the 
situation  impels  them  with  unique  force. 
The  general  features  of  railroad  rates,  then,  are  — 

(1)  Some  charges  based  on  the  difTeronce  between 
the  natural  value  of  merchandise  at  the  point  of  origin 
and  its  value  at  the  point  of  delivery,  as  this  latter 
value  is  determined  by  causes  independent  of  the 
rates  charged  for  transportation  between  the  two 
points; 

(2)  The  adjustment  of  other  charges  according 
to  costs  incurred  by  independent  carriers  operating 
between  the  same  points; 

(3)  The  exceptional  importance  of  the  railroad's 
"fixed  costs"  and  the  drastically  discriminating 
rates  to  which  this  leads; 


THE   RAILROAD   PROBLEM 


419 


W 


(4)  The  irresistible  motive  for  combination  where 
direct  competition  appears  between  railroads  con- 
necting the  same  points. 

We  speak  of  the  condition  of  railroads  as  an  inter- 
mediate state  because  it  is  one  out  of  which  a  natural 
development  takes  other  carriers  when  their  capacity 
for  service  is  fully  utilized.     The  same  cause  —  a 
complete    utilization    of    the    plants  —  would    have 
a  like  effect  in  the  case  of  railroads;    but  the  cause 
is  so  slow  in  coming  into  full  operation  that  few  per- 
sons think  of  it  as  affecting  the  problem  at  all.    The 
problem  of  freight  charges  on  railroads  is  usually 
regarded  as  if  the  intermediate  state  were  destined 
to  be  perpetual.     It  is,  however,  entirely  true  that  a 
full  utilization  of  the  plants  of  railroads  would  tend  to 
take  them  out  of  this  state.    If  the  increase  of  busi- 
ness came  after  a  combination  had  been  effected,  it 
would  tend  to  put  a  stop  to  the  sharp  discriminations 
to  which  the  eager  quest  for  traffic  has  led.    Different 
shippers  could  more  easily  secure  equally  favorable 
treatment.    Freight  of  a  low  grade  would  be  less 
desired,  since  the  space  it  would  require  might  other- 
wise be  available  for  business  of  a  more  profitable 
kind,  and  the  rates  on  such  freight  would  rise.    The 
increased  traffic  would  make  it  possible  to  earn  large 
dividenils  without  increasing  charges  on  the  lower 
grades  of  freight,  and  while  greatly   reducing  the 
charges   on    the    higher  grades;     but  no  economic 
force  would  be  available  for  securing  this  adjustment. 
The  state,  by  positive  regulation,  might  secure  it  and 
might  bring  the  earnings  and  the  charges  of  the  rail- 
roads more  or  less  nearly  to  the  normal  standards 
which  prevail  where  competition  rules ;  but  if  com- 
petition were  here  to  begin,  it  would  result  quite 


fiP 


if' 


420 


ESSENTIALS   OF   ECONOMIC  THEORY 


otherwise.  It  would  restore  the  old  condition  of  par- 
tially utilized  cars,  track,  etc.,  and  cause  a  new  strife 
for  traffic,  which  would  cause  some  freight  to  be  taken 
at  very  low  rates,  but  would  lead  to  inevitable  con- 
solidation and  higher  charges. 

In  general  industry  competition  tends  so  to  ad- 
just prices  as  to  yield  interest  on  capital,  wages  for  all 
varieties  of  labor,  including  labor  of  management, 
and  nothing  more,  and  this  is  the  outcome  elsewhere 
demanded  by  a  growth  of  business  coupled  with  a 
theoretically  normal  and  perfect  action  of  com- 
petition; but  the  peculiarities  of  competition  be- 
tween railways  do  not  bring  about  the  evolution  which 
would  give  this  result.  Combination  is  effected  long 
before  the  returns  from  the  total  traffic  are  made 
normal  and  before  the  returns  from  different  parts  of 
it  are  brought  into  their  legitimate  relation  to  each 
other.  After  the  union  of  rival  companies,  railroads 
continue  to  be  in  that  intermediate  state  in  which  the 
effect  of  an  unused  capacity  for  carrying  has  its  nat- 
ural effect  in  charges  which  discriminate  widely  be- 
tween different  localities  and  between  different  kinds 
of  freight.  The  railroad  traffic  does,  indeed,  begin 
to  follow  the  course  which  we  have  illustrated  in  the 
case  of  transportation  by  water.  It  takes  a  few 
steps  in  that  direction,  but  further  progress  is  then 
stopped  by  combinations. 

The  fundamental  laws  of  economics  still  apply. 
The  static  standard  of  freight  charges  exists,  and 
one  can  form  some  idea  of  what  actual  charges  would 
be  if  the  forces  which  elsewhere  tend  to  bring  prices 
to  their  theoretical  standards  could  here  operate 
unhindered.  The  hindrances,  however,  are  such  as 
definitely  to  preclude  such  a  result.    The  rates  do 


THE   RAILROAD   PROBLEM 


421 


not  become  in  a  true  sense  normal.  Even  under 
such  active  competition  as  at  times  exists  they  do 
not  become  so,  while  without  competition  they  never 
tend  to  become  so.  It  would,  however,  be  a  gross 
mistake  to  assume  that  static  standards  have  no  ap- 
plication whatever  to  railway  transportation.  The 
whole  subject  is  mast  easily  understood  when  those 
standards  are  first  defined  and  the  baffling  influences 
which  prevent  actual  rates  from  conforming  to  them 
are  then  separately  studied.  There  are  influences 
which  bring  the  various  charges  of  railroads  within 
a  certain  definable  distance  of  normal  standards. 

The  situation  of  railroads  we  take  as  we  find  it 
—  one  of  complete  consolidation  in  case  of  many 
roads,  and  of  harmonious  action,  or  quasi-consolida- 
tion,  in  the  case  of  others.  In  general  their  charges 
are  fixed  by  the  place  value  they  create,  as  that 
value  is  established  by  influences  other  than  the 
charges  themselves.  It  might  seem  that  the  charge 
for  carrying  fixes 
the  place  value. 
Whatever  a  rail- 
road demands  for 
carrying  goods 
from  A  to  B 
measures  the  en- 
hanced    value 

which  they  get  in  the  moving;  but  if  they  would 
have  possessed  at  B  the  same  value  that  they  now 
have,  even  though  the  railroad  had  not  existed  at  all, 
it  is  evident  that  it  is  this  value  minus  the  value  of 
the  goods  at  A  which  fixes  the  charges  for  carrying, 
rather  than  that  these  charges  fix  the  place  value. 
We  have  seen  in  very  simple  and  general  cases  how 


WATCH  KOUTE 


\4h 


■It 


-11 


422 


ESSENTIALS   OF    ECONOMIC  THEORY 


this  principle  works,  and  have  now  vory  briofly  to 
trace  the  working  of  it  in  the  case  of  a  system  of 
railroads.  The  special  method  of  reckoning  costs  to 
which  we  have  referred  is  an  important  element  in 
the  process. 

"Costing"    comparatively    Simple     in    the    Book- 
keeping   of    Competing    Producers.  —  In    the    study 
of  ordinary  industries  we  have  encountered  condi- 
tions which  render  the   bookkeeping  of  a  producer 
simple  and  cause  him  to  charge  all  his  costs,  in  a 
pro  rata  fashion,  to  his  entire  product.     If  his  goods 
and  those  of  his  rivals  are  of  one  kind  and  are  sold 
in  a  single  market,  a  cut  in  the  price  of  any  one 
portion    of   the   product    involves   a   corresponding 
cut   on   the   entire   output.     It   is   not   possible   to 
single  out  any  particular  increment  for  a  reduction 
of  price  and  leave  the  rate  unchanged  on  the  re- 
mainder.    Where    products   are   of   different    kinds 
it  is  possible  to  make  a  classification  of  them  so  as 
to  get  a  large  profit  on  some,  a  small  one  on  others, 
and  none  at  all  on  still  others.     When  competition 
has  not  done  its  full  work,  something  of  this  kind 
happens    in    many    departments    of    business.     A 
condition  of  unequal  gain   from   different   portions 
of  an  output  lingers  long  after  some  effects  of  com- 
petition have  been  realized.    In  the  end,  however, 
it  must  yield  if  competition  itself  does  its  complete 
work,  and   whenever  we  adhere  heroically  to  the 
hypothesis    of   the   static   state,    we   preclude   this 
inequality    of   charges.     Rivals    who   contend    with 
each  other  for  profitable  business  bring  the  prices 
of  the  goods  which  afford  the  most  gain  to  such  a 
level  that  a  mill  which  makes  this  type  of  goods 
will  pay  no  more  in  proportion  to  its  capital  than 


TWE    RAILROAD    PROBLEM 


423 


one  which  makes  oth.  r  types.  The  total  co^t  of 
production,  fixed  and  variable  alike,  *ould  at  that 
time,  as  w(  have  seen,  be  barely  covert  1,  and  might 
correctly  l)o  apportioned  in  a  pro  rata  manner  among 
all  parts  of  the  product. 

The  Effect  of  Increasing  Business  on  Corrparative 
Charges.  — CompctiiMn    of    this    perfect    kind   does 
not  exist  in  manufacturing  and  is  far  from  existing  'n 
the  department  of  carrying,  and  it  is  important  vo 
know   whether  with  growing   business   and  greatly 
tempered  rivalry  there  is  any  tendency  toward  the 
equalization  of  charges  and  the  simplifying  of  the 
mode  of  reckoning  costs.    When  a  mill  has  more 
orders  than  it  can  fill,  those  it  wishes  to  be  rid  of 
are  the  ones  which  yield  the  smallest  profit.    They 
encumlwr  the  mill  and  prevent  the  filling  of  more 
profitable  orders;   and  the  natural  mode  of  reducing 
the  amount  of  this  undesirable  part  of  the  output 
is  to  raise  the  charges  on  it.    This  comes  about 
without  much  aid  from  competition,  for  when  all 
producers  find  their  capacity  overtaxed,  they  have 
no    motive    for    contending    sharply    for    business. 
Underbidding  has  for  its  purpose  attracting  business 
from    rivals    and    is   an   irrational   operation    when 
all  have  orders  enough  and  to  spare.    Competition 
is  largely  in  abeyance  when  the  business  any  one 
can  have  is  overabundant. 

These  Principles  Applicable  to  Carrying.  — W'hat 
we  here  assert  concerning  goods  manufactured  by 
independent  mills  would  be  true  of  goods  carried 
by  independent  vessels,  if  they  plied  between  the 
samfi  two  ports  with  no  intermediate  stops,  if 
their  capacity  should  at  any  time  be  overtaxed, 
they  would  not  reduce  the  charges  o-  higher  grades, 


.-  f 


1^ 


!l! 


424 


essentiaTjS  of  economic  theory 


but  they  would  raise  them  on  the  lower  grades, 
and  the  classification  of  freight  would  lose  some 
of  its  significance.  The  lowering  of  the  charges 
on  the  high  grades  of  freight  would  come  when  the 
profits  of  the  business  should  attract  new  carriers, 
who  would  naturally  seek  for  the  traflic  that  paid 
the  best,  till  all  kinds  paid  about  alike.  The  mode 
of  reckoning  costs  might  then  become  simple  — 
a  pro  rata  division  of  total  outlays  among  all  parts 
of  the  business. 

Th^  Condition  of   Uniform  Costing  never  realized 
upon  Railroads.  —  Not  a  single  one  of  the  essential 
conditions  of  equalized  charges  and  uniform  costing 
is  now  realized  upon  railroads,  and  there  is  only  one 
of  them  that  is  approximated.    Separate  markets 
for  different  parts  of  the  traffic  are  provided  by  the 
nature    of    the    business.     Every    point    to    which 
goods  are  conveyed  furnishes  such  a  distinct  market, 
and  the  service  of  carrying  goods  to  it  is  paid  for 
by  a  distinct  set  of  customers.    It  follows,  there- 
fore, that  some  rates  can  be  cut  without  affecting 
others,  and  they  regularly  are  so.    The  second  con- 
dition,  that  of   bringing  the  carrying  capacity  of 
railroads  into  the  fullest  possible  use,  is  attainable, 
but  it  is  very  remote.    At  times  there  is  a  congestion 
of  freight  and,  in  general,  the  capacity  of  existing 
plants  i.s  more  nearly  used  than  it  heretofore  has 
been ;    but  by  an  addition  to  the  rolling  stock  they 
could  carry  more  than  they  do  and  the  additional 
traffic  would  cost  far  less  than  the  portion  already 
carried.     Moreover,  with  no  addition  to  the  rolling 
stock,    very    considerable    enlargements    of    traffic 
could    at    many    points    be    made.    Thirdly,    com- 
petition between  railroads  is  not  at  present  effective 


THE   RAILROAD    PROBLEM 


425 


■  1  .  i, 


enough  to  bring  about  a  reduction  of  the  higher 
charges  and  make  returns  and  costs  simple.    Com- 
bination takes  place  long  before  the  discriminating 
charges    are    abandoned.    Low-grade    freight    con- 
tinues to  be  carried  side  by  side  with  the  high-prade 
which    pays    better.    Charges    to    terminal    points 
continue  to  be  low,  while  charges  to  intermediate 
points  are  high.    In  a  sense  one  may  say  that  a 
tendency  to  discontinue  these  practices  exists,  but 
it  is  a  tendency  that  is  so  effectually  resisted  that 
its  natural  results  are  only  in  small  part  realized. 
If  a  dam  is  built  across  a  reservoir,  holding  the  waters 
on  o>ie  side  ten  feet  above  those  on  the  other,  one 
may  sa^  that  the  waters  have  a  tendency  to  reach 
a  uniform  le-  ^1,  since  the  power  of  gravity  is  ex- 
ercised in  tht.  direction;    but  the  dam  baffles  the 
tendency.    And    so    in      lilroad    operations    some- 
thing interferes  which  checks  the  force  of  competi- 
tion or  removes  it  altogether,  long  before  the  dis- 
criminations in  freight  charges  are  removed  or  very 
much  reducetl. 

An  Iniermediate  Slate  made  relatively  Permarwnt. 
—  As  we  have  said,  the  condition  of  traffic  on  rail- 
roads is  analogous  to  what  in  the  case  of  manu- 
facturers and  primitive  carriers  would  be  regarded 
as  a  transitional  state  soon  to  be  left  behind;  but 
in  the  case  of  railroads  it  is  relatively  permanent. 
It  is  the  condition  in  which  certain  natural  economic 
forces  are  working  vigorously,  and,  if  they  were  not 
counteracted  by  other  forces,  would  end  by  mak- 
ing natural  adjustments  and  establishing  normal 
rates  for  the  carrier  as  well  a-s  the  manufacturer. 
In  this  intermediate  state  the  natural  forces  arc 
counteracted  and  the  adjustments  are  never  made, 


W  A 


i 
It 


\    ■ 


426 


ESSENTIALS  OF  ECONOMIC  THEORY 


I 

w 

BE  1 


I 


MIUKMO 


and  what  we  have  to  study  is  the  degree  in  which 
they  are  approximated. 

A  Simple  Case  of  Special  Costing  Applied  to 
Certain  Traffic. —  We  will  suppose  A  and  B  are 
connected  by  a  railroad,  while  C  and  B  are  connected 
by  a  highway  over  which  transportation  proceeds 
by  the  primitive  means  of  horses  and  wagons.  It 
is  like  one  of  the  cases  we  have  already  stated,  with 
the  exception  of  the  fact  that  the  carrier  over  the 
longer  route  is  a  railroad.    The  limit  of  what  the 

railroad   can   get 
is  the  natural 
difference    be- 
tween the  cost  of 
making  the  goods 
at  A  and  the  com- 
bined costs  of  making  them  at  C  and  carrying  them 
to  B.    This  definitely  limits  the  railroad  charges. 
Whatever  difference  of  cost   there  is  the  railroad 
can  get  if  it  chooses,  and  barring  any  deduction 
it  may  make  in  order  to  induce  production  at  A  and 
make  traffic  for  itself,  it  will  get  it.    The  rate  which 
is  fixed  for  the  railroad  may  be  sufficient  to  cover 
the  total  costs  chargeable  to  this  portion  of  its  traffic 
on  the  simple  and  pro  rata  plan  of  costing,  or  on  the 
other  hand,  it  may  cover  only  a  portion  of  the  fixed 
costs  or  no  portion  at  all.    This  means  that  the 
standard  which  is  set  by  the  differing  values  of  the 
goods  at  A  and  at  B  may  or  may  not  yield  a  profit 
to  the  railroad.     If  it  is  so  slight  as  not  to  cover 
even  the  variable  costs  of  carrying  the  goods    the 
railroad  will  not  carry  them,  and  the  supply  will 
be  allowed  to  come  from  C  rather  than  from  A. 
If  it  covers  more  than  these  variable  costs,  the  road 


THE   RAILROAD   PROBLEM 


427 


will  accept  and  carry  the  goods.     If  the  traffic  affords 
any  appreciable  margin  above  the  variable  costs,  it 
will  be  the  policy  of  the  railroad  to  make  its  charges 
low  enough  to  attract  the  traffic,  and  this  will  slightly 
reduce  the  place  value  of  the  goods  at  B  and  bring 
it  below  the  cost  of  procuring  them  from  C.    The 
railroad  will  thus  secure  the  whole  traffic  to  the 
exclusion  of  that  which  came  from  C.    If  the  costs 
of  making  the  goods  at  A  and  C  are  alike,  then  the 
charge  for  carrying  from  A  to  B  will  be  just  enough 
below  the  total  costs  of  carrying  in  wagons  from  C 
to  B  to  stop  the  carrying  over  this  shorter  route  and 
appropriate  the   whole   business;    but   this   charge 
may  not  cover  total  costs  of  carrying  from  A.    It 
may  yield  only  a  slight  margin  above  the  variable 
costs  attaching  to  this  part  of  the  railroads  business. 
It  thus  appears  that  this  carrier  can  with  advantage 
accept  the  freight  at  a  rate  that  by  a  perfectly  normal 
bookkeeping  is  below  cost,  while  the  teamsters  on  the 
road  from  C  cannot  do  this. 

A  Second  Case  in  which  Carrying  is  done  for  Any 
Amount  above  Variable  Cost.  —  Let  us  now  suppose 
there  is  a  railroad  from  C  to  B  as  well  as  one  from 
A  to  B.    There  is  ^ 

now  competition 
between  makers 
at  A  and  carriers 

from  A  to  B,  on    A^ 

the  one  hand,  and 

makers  at  C  and  carriers  from  C  to  B,  on  the  other 
hand;  and  whichever  of  these  qua.si-partnerships 
delivers  the  goods  at  B  at  the  cheaper  rate  gets  the 
whole  traffic.  By  the  terms  of  our  supposition  the 
makers  in  both  places  are  offering  goods  at  cost, 


RAILrtOAD 


— B 


m^i 


428 


ESSENTIALS  OF    ECONOMIC  THEORY 


si* 


and  any  cutting  of  rates  that  is  to  be  done  must 
be  done  by  the  carriers.    To  reduce  the  prices  of 
the  goods  at  the  mills  in  either  locality  would  put 
some  of  them   out   of   business.    We   will   assume 
that  there  is  no  consolidation  and  no  other  means 
of   concurrent  action    between    the    railroads,  and 
that  the  whole  traffic  will  thus  go  to  the  route  over 
which  the  lower  rates  are   made.    For  simplicity 
we  will  still  adhere  to  the  supposition  of  equal  costs 
for  manufacturing  and  of  unequal  costs  for  carrying. 
As  the  charge  for  carrying  goes    lown,  one  or  the 
other  of  the  railroads  wiii  reach  the  point  where 
the  variable  costs  of  this  traffic  are  barely  covered, 
while  on  the  o.her  line  they  are  more  than  covered. 
Where  rivalry  is  not  tempered  in  any  way  what- 
ever, the  charge  made  by  competing  roads  falls  to 
a  leve'  at   which   returns  only  cover  the  variablo 
costs  incurred  by  one  of  the  competitors,  though 
it  may  return  somewhat  more  in  the  case  of  the 
other. 

How  Fixed  Costs  are  Met.  —  This  implies,  indeed, 
that  the  fixed  charges  of  both  roads  must  somehow 
be  met  by  the  returns  from  other  traffic;  and  this 
supposition  is  in  accordance  with  the  facts.  A 
freight  war  may  temporarily  carry  rates  to  a  level 
where  some  traffic  does  not  cover  variable  costs  and 
where  total  trtffic  falls  short  of  covering  total  costs. 
Such  a  situation  cannot  long  continue,  and  the  natu- 
ral adjustment,  under  active  competition,  is  one  at 
which  rates  on  the  traffic  for  which  the  two  lines 
are  contending  are  just  below  the  variable  costs 
incurred  by  ono  lino  but  above  those  incurred  by 
the  other.  Thoro  is  nothing  to  prevent  the  .stronger 
railroad   from   thus   reducing   its   rates,   attracting 


THE   RAILROAD   PROBLEM 


429 


to  itself  the  whole  of  the  traffic,  and  putting  an  end 
to  the  rivalry  of  the  other  line.  This  would  mean 
bankruptcy  for  that  line  unless  it  had  other  sources 
of  income. 

Tlie    Effects    of    Bankruplci/    on    Costt<.  —  Bank- 
ruptcy moans  a  scaling  ilown  of  the  fixed  charges 
of  the  railroad  to  such  a  point  that  the  total  traffic 
can  meet  them;    but  it  does  not  enable  the  com- 
pany to  reacquire  business  that  will  not  yield  enough 
to  cover  variable  costs.     Adhering  to  the  supposi- 
tion that  there  is  no  mutual  understanding,  no  pool, 
and   no   other   approach   to   consolidation    between 
the  rival  lines,  we  may  safely  say  that  the  general 
rule  which  elsewhere  governs  rates  holds  true  here. 
Two   roads   actively  competing   for  identically   the 
same  traffic  tend  to  bring  charges  to  a  level  at  which 
the  variable  charges  entailed  by  this  traffic  on  the 
one  route  are  not  quite  met  and  the  traffic  passes 
to  the  other  line.' 
A     Principle 
governing       Com- 
petition     between 
Railroads    and 
Carriers  by  Sea.  — 
In   a   third    case 
there  may  be  be- 
tween A  and  B  a  railroad  and  a  water  route  also, 
while  between  C  and  B  there  is  a  railroad  only.     On 
the  supposition  we  have  made, — that  comp«'tition 
between  carriers  by  water  has  done  its  full  work,  — 

'  If  we  wish  to  vary  our  supposition  that  the  cost  of  mak- 
ing the  Roods  at  A  and  at  C  is  the  same,  we  have  a  modifica- 
tion of  the  case  we  have  stated.  If  it  is  much  cheaper  to 
make  them  at  A,  the  railroad  that  carries  these  goods  from 
there  to  B  may  charge  mure  for  carrying  than  does  the  one 


WATER  R9UTC 


430 


ESSENTIALS  OF  ECONOMIC  THEORY 


m 

'  ■  *^- 

li 
i 


the  charge  foi-  carrying  anything  by  water  from  A 
to  B  must  be  sufficient  to  cover  a  pro  rata  part  of 
the  total  costs.    That  may  be  sufficient  to  cover  the 
merely  variable  costs  entailed  on  the  railroad,  or  it 
may  not.    If  it  does  not,  the  railroad  will  not  take 
any   portion  of  the   business   except  what  it  may 
take  by  reason  of  the  greater  speed  with  which  it  can 
transport  the  goods.     If,  however,  the  total  costs  of 
carrying  by  water  exceed  by  a  tolerable  margin  the 
merely  variable  costs  of  carrying  by  land,  the  railroad 
will  be  able  to  take  the  traffic.    If  this  traffic  goes  to 
the  water  route,  the  charge  made  by  the  railroad  from 
C  to  B  is  adjusted  by  a  simple  rule.    This  railroad 
can  get  the  natural  difference  between  the  cost  of  the 
goods  at  C  and  the  cost  of  similar  ones  made  at  A 
and  carried  by  water  to  B.    If  the  railroad  gets 
the  traffic  between  A  and  B,  and  the  water  route 
is  abandoned,  the  case  becomes  the  same  as  that 
which    we    have    already    considered,  —  the    trans- 
porting is  done  at  a  rate  which  prevents  one  of  the 
lines  from  covering  its  merely  variable  costs  and 
secures  all  the  traffic  for  the  other  line.    The  carry- 
ing from  A  to  B  goes  by  land  or  by  water  accord- 
ing as  the  variable  costs,  in  the  one  case,  or  the  pro 
rata  share  of  total  costs,  in  the  other,  are  the  less; 
and  nothing  can  be  carried  from  C  to  B  unless  it 
can  be  delivered  at  B  at  a  price  as  low  as  that  of 
goods  made  at  A  and  transported  at  the  rate  just 
described.    If  the  costs  of  making  at  A  and  C  are 

that  delivers  the  goods  made  at  C.  It  is  possible  that  the 
difference  between  the  costs  of  making  at  the  different  points 
may  tell  decisively  in  favor  of  the  longer  route,  and  it  may 
be  the  railroad  from  C  to  B  that  first  reaches,  in  its  charges, 
the  level  of  variable  costs  and  sees  its  traffic  handed  over  to 
its  rival. 


THE  RAILROAD   PROBLEM 


431 


equal  and  there  are  the  three  carriers  seeking  traffic, 
as  assumed,  the  result  naturally  is  to  give  all  the 
business  to  the  one  who  will  bid  the  lowest  for  it. 
Either  railroad  will  bid  as  low  as  the  variable  costs 
which  the  traffic  occasions;  while  the  owners  of 
ships  will  bid  no  lower  than  the  rate  which  covers 
costs  of  both  kinds.' 

The  Case  of  Railroads  having  Common  Terminal 
Points.  —  In  the  fourth  case  there  are,  besides  the 
other  carriers,  two  railroads  between  A  and  B  which 


MIUKMO 


compete  for  the  traffic  at  these  terminal  points, 
but  not  at  intermediate  ones.  Their  facilities  for 
through  traffic  are  alike.  The  local  traffic  on  the 
different  lines  is  unlike,  since  it  is  affected  by  the 
character  of  the  regions  through  which  the  railroads 
pass;  but  the  charges  made  for  local  traffic  are 
governed  by  the  comparatively  simple  principles 
which  we  first  stated.  In  contending  for  freight 
to  way  stations  we  may  say  that  the  railroad  has 
to  compete  with  wagons  upon  the  highway,  but 
with  nothing  more  efficient.  The  charges  for  local 
freight    may    therefore    be   extremely   high,   while, 

'  If  carriers  by  water  are  in  that  intermediate  state  in 
which  their  capacity  is  only  partially  used,  they  also  may 
oflfer  to  take  some  traffic  for  an  amount  which  only  covers 
variable  costs;  but  this  condition  does  not  naturally  be- 
come in  their  case  semipermanent,  as  it  does  in  the  case  of 
railroads. 


or 


IHr] 


432 


ESSENTIALS  OF  ECONOMIC  THEORY 


y^ 


u 
I! 


if  the  railroads  are  really  competing  as  vigorously 
as  pure  theory  requires,  and  if  the  normal  results 
of  competition  are  completely  realized,  the  rate 
which  can  be  maintained  between  A  and  B  for  any 
articles  carried  will  be  no  higher  than  those  whicli 
cover  the  variable  costs  entailed  on  the  route  which 
is  the  less  economical  of  the  two.  The  line  to  which 
this  test  assigns  the  traffic  between  A  and  B  must 
then  stand  the  further  tests  we  have  described  — 
those  involved  in  contending  for  business  with 
carriers  using  respectively  the  water  route  and  the 
railroad  from  C  to  B. 

A  Condition  leading  to  a  Reduction  of  Fixed  Costs. 
—  It  is  safe  to  assume  that  one  of  the  two  railroads 
from  A  to  B  has  more  local  traffic  than  the  other. 
It  may  be  that  even  with  this  advantage  its  total 
returns  of  all  kinds  may  fall  short  of  covering  its 
total  outlays.    In  that  case  the  total  returns  of 
any  less  favorable  route  must  fall  still  further  short 
of  the  amount  necessary  for  covering  all  outlays; 
and  if  we  adhere  to  the  assumption  that  neither 
consolidation    nor    anything    resembling    it    takes 
place,  we  have  a  case  in  which  both  railroads  must 
undergo  reorganization.    The  fixed  chaiges  of  the 
better  route  must  be  scaled  down  and  the  creditors 
of  this  railroad  must  accept  the  loss,  while  on  the 
other  route  the  fixed  chargrs  must  be  reduced  still 
more  and  the  creditors  must  suffer  a  larger  loss. 
It  goes  without  saying  that  the  prospect  of  such 
a    calamity    means    consolidation.    It    is    evident 
what  alternative  competitors  face  in  cases  in  which 
heroic  competition  goes  on  to  the  bitter  end.    As 
a  rule  this  is  an  unrealized  alternative.    The  mere 
prospect  of  the  calamity  connected  with  it  b  bad 


THE  RAILROAD   PROBLEM 


4a3 


enough  to  put  an  end  to  the  independent  action 
of  the  different  railroads.  With  the  far'lities  for 
combination  which  now  exist  a  far  smalki  induce- 
ment suffices  to  bring  this  about. 

The  Case  of  Railroads  whose  Entire  Routes  are 
Parallel  — We  have  to  consider  only  one  more 
typical  case  in  order  to  have  before  us  a  sufficient 
number  to  establish  the  general  principles  which 
govern  the  charges  for  the  carrying  ol  freight  by 
railroads.  Variations  innumerable  might  be  stated; 
and,  indeed,  the  experience  of  the  railroad  system 
of  this  country  affords  the  variations  and  reveals 
the  results  which  follow  from  the  conditions  they 
create.  The  railroads  may  be  strictly  parallel 
lines,  pursuing  the  same  route  and  competing  for 


f  .- 


-  ^' 


r:B 


local  traffic  as  well  as  for  through  traffic.  If  the 
case  we  lately  examined  insures  consolidation,— 
and  indeed  all  of  the  cases  we  have  stated  impel 
the  companies  powerfully  toward  it,  — this  last 
case  makes  assurance  doubly  sure.  Strictly  parallel 
railroads  competing  for  traffic  over  their  entire 
routes  and  neither  uniting  nor  showing  any  of  the 
approaches  to  union  would  be  an  impossibility. 
Persistent  competition  would  then  mean  reducing 
all  charges  to  the  level  fixed  by  variable  costs,  which 
would  leave  no  revenue  whatever  to  cover  fixed 
costs,  and  would  send  the  companies  into  a  bank- 
ruptcy from  which  evon  reorganizations  could  not 
relieve  them,  since  they  could  not  annihilate  all 
the  fixed  costs. 
2r 


434 


ESSENTIALS   OP  ECONOMIC  THEORY 


1 
•'I 


A  Case  of  Arretted  Development.  —  It  is  clear  that, 
in  the  entire  policy  of  railroadtt,  the  fact  that  their 
capacity  has  never  been  fully  used  plays  a  highly 
important  part.     It  makes  the  distinction  between 
fixed  costs  and  variable  ones  a  leading  element  in 
the    adjustment    of    charges.     With    the    capacity 
of  railroads  completely  u.sed,  as  is  that  of  a  sh-'p 
which  carries  a  full  cargo  at  every  voyage,  the  dis- 
tinction wouKl  lose  most  of  its  importance.     More 
business  would  then  retjuire  an  addition  to  every 
part  of  the  plant  and  would  thus  entail  new  fixed 
costs  which  would  have  to  be  charged  against  the 
new  business.    As  the  traffic  of  any  railroad  grows 
toward  its  maximum,  the  cost  which  each  separate 
addition  to  it  entails  grows  larger  and  larger.     When 
cars  are  few  and  are  only  half  filled,  an  increment 
of  traffic  entails  a  very  small  increment  of  expense. 
When  the  cars  are  filled  and  new  freight  requires 
the  purchase  of  more  of  them,  the  cost  of  this  ad- 
dition to  the  traffic  liecomes  greater.     When  further 
additions   to  the   freight   carried   require  additions 
to   trackage,   yard   room,   storage   room,  etc.,  they 
cost  far  more  tlian  the  earlier  additions;  and  new 
increments  of  freight  come,  in  the  end,  to  cost  very 
nearly  as  much  per  unit  as  the  general  body  of  the 
previous    traffic    when    all    outlays    were    charged 
against  it.    Tie  railroad  approaches  the  condition 
of  the  full  .ships  referred  to,  in  which  further  cargoes 
rcfjuiro   further  ships,   with  all  the  outlays   which 
this  implies.    The  distinction  between  different  kinds 
of   costing   Is   gradually   obliterated,   and   railroads 
steadily  dr.aw  ne.arer  to  that  ultimate  state  whicli 
other    carriers    more    quickly    approach,    in    which 
each  part  of  the  freight  carried  must  bear  its  share 


■-':-^ffiSk:-  -Jt&ttii:* 


THE  RAILROAD  PROBLEM 


435 


of  the  total  costs  entailed.  Long  btfnre  that  state 
is  reached,  however,  combination  ensues,  and  the 
movement  of  freight  charges  toward  their  static 
standard  is  arrested. 

The  Standard  of  Freitjht  Charges  inider  a  Regime 
of  Monopoly.  —  A  consolidation  so  coniplete  that  it 
would  merge  all  rival  lini's  ii  <ler  a  single  board  of  con- 
trol and  pool  all  their  earnings  would  restore  the  early 
condition  descrilxnl  in  connection  with  one  of  our 
illustrations  —  that  of  the  single  railroad  between 
A  and  B,  having  only  sailing  vessels  and  wagons  as 
rivals.  It  is 
able  to  charge 
what  the  traffic 
will  bear  in  a 
simple  and 
literal  sense. 
The    consoli- 


wATt*  noun 


dated  lines  can,  if  they  choose,  get  for  each  bit  of 
carrying  the  difference  between  the  value  of  goods  at 
the  point  where  they  are  taken  and  their  value  at 
the  point  where  they  are  delivered.  These  values 
are  approximately  what  they  would  be  if  no  railroad 
existed.  The  carrying  done  by  the  railroad  itself  does 
not  enter  into  the  making  of  them.  The  natural  value 
of  a  commodity  at  A  is  what  it  costs  to  make  it  there, 
and  the  value  at  B  is  either  the  cost  of  making  it  at  B, 
or  that  of  making  it  at  C  and  carrying  it  in  wagons  to 
B,  or  that  of  making  it  at  A  and  carrying  it  by  water 
to  B.  In  any  case  there  is  u  natural  and  simple  pro- 
cess of  fixing  the  costs  both  at  A  and  at  B,  and  the 
difference  between  them  is  the  limit  up  to  which  the 
railroad  can  push  its  charges  if  it  will.  Where  the 
business  which  furnishes  the  freight  is  not  fully  ilev»l- 


M 


m 


436 


ESSENTIALS  OF  ECONOMIC  THEORY 


i  '  H 

iff 
si 


li 


oped,  the  railroad  may  moderate  its  charges  for  the 
sake  of  letting  it  grow  larger.  The  hojM*  of  in- 
creased traffic  in  the  future  may  cau.se  a  reduction  of 
demands  in  the  present.  We  shall  see  what  other  in- 
fluences may  keep  the  charges  below  their  possible 
level;  but  the  natural  difference  between  two  local 
values  of  goods  is  the  basis  of  the  charge  for  carrying 
them  from  one  point  to  tJ-e  other.  Con-olidatod 
lines,  if  they  had  as  perfect  a  monopoly  of  carr>'ir.f' 
by  railroad  as  has  the  single  line  in  our  illustration, 
would  base  their  charges  on  this  simple  principle, 
though  for  a  number  of  reasons  they  might  not  take 
all  that  the  principle  would  allow. 

Hoiv  Imperfect  Consolidation  Works.  —  Imperfect 
con.solidation,  when  it  follows  a  peripd  of  sharp  com- 
petition, has  to  deal  with  obstacles  which  prevent  a 
complete  carrying  out  of  this  policy.  Many  rates 
have  become  far  lower  than  the  rule  of  monopoly 
would  make  them,  and  there  are  difficulties  in  the  way 
of  raising  them.  A  werk  combination  of  parallel 
lines  may  keep  its  charges  within  bounds,  partly 
from  a  fear  that  larger  ones  may  afTord  too  great  an 
incentive  to  secret  rate  cutting  and  may  so  break 
up  the  union,  and  partly  from  a  respect  for  what 
the  people  may  do  if  the  exactions  of  the  railroads 
become  too  great.  The  more  complete  forms  of  con- 
solidation have  not  the  former  of  these  dangers  to  fear ; 
and  if,  without  being  restrained  by  the  state,  their 
charges  continue  moderate,  it  is  mainly  due  to  the  fact 
that  other  lines  less  firmly  consolidated  are  unable 
safely  to  make  a  radical  advance  of  rates,  and  that  this 
often  prevents  such  a  course  in  the  case  of  lines  which 
would  otherwise  be  able  to  take  it. 

Limits  on  the  Charges  of  a  System  of  strongly  Con- 


THK    RAILROAD    PROBLEM 


437 


(-• 


''i    i^ 


-I, 


It 

'0 


■  iM  )~ 


of 
!•  >ur 
.•ablo 
\  any 


sdidated  Lines. —  This  means  that  whore  a  great 
system  of  railroads  occupying  the  whole  of  a  vast 
territory  is  so  fiimly  consolidated  as  to  have  a  com- 
plete monopoly  of  carrying  by  rail  within  the  area, 
it  is  still  affected  in  indirect  ways  by  the  possible 
rivalry  of  lines  altogether  outside  of  its  territory.  An 
excessive  charge  on  freight  from  Chicago  to  New 
York  might  induce  carrying  by  i*'nn  Chicago 

to  Norfolk  and  thence  by  watrr 
might  cause  grain,  flour,  etc.,  ic  i 
from  Southern  ports  rather 
Atlantic  coast.  These  casf  >  mi  •. 
under  princi{)lcs  essential^'  w.T\ 
already  stated,  but  they  ,.  <  it  t: 
the  same  principles  in  compl  •  c  s 
study  is  too  brief  to  cover.  Th< n- 
case  in  which  nearly  all  that  couK.  ; 
railroatl  connecting  Chicago  with  the  Atlantic  coast, 
even  though  every  line  in  the  territory  between 
them  were  the  property  of  one  corporation,  would  be 
the  variable  cost  of  carrying  goods  over  a  Vmc  ruiming 
to  a  port  on  the  Gulf  of  Mexico.  Reflection  will 
e.";sily  show  how  the  principles  already  stated  apply 
to  this  case  and  others. 

Effects  of  a  General  and  Strong  Consolidation.  — 
With  all  the  lines  in  this  country  and  Canada  in  a 
strong  consolidation,  the  advance  of  -ates  to,  or  well 
toward,  the  limit  set  by  the  principle  of  natural  place 
value  created  would  inevitably  come  unless  the 
power  of  the  state  should  in  some  way  prevent  it.  The 
railroads  would  be  able  to  get  the  difference  between 
the  cost  of  goods  at  A,  in  the  illustrati  v'c  case,  and  the 
cost  o'  making  or  procuring  them  at  B  without  using 
the  connecting  line  of  railroad.    When  the  appeal  to 


I- 


I       i 


438 


ESSENTIALS   OF  ECONOMIC  THEORY 


II 


n 


the  state  is  only  imminent,  —  when  the  power  of  the 
government  is  not  yet  exercised,  but  impends  over 
every  railroad  that  establishes  unreasonable  charges, 

—  the  rates  may  be  held  in  a  fair  degree  of  restraint. 
A  wholesome  respect  for  the  possibilities  of  lawmaking 
here  takes  the  place  of  actual  statutes.  A  respect 
for  the  law  appears  in  advance  of  its  enactment  and 
may  amount  to  submitting  rates  in  an  imperfect  and 
irregular  way  to  the  approval  of  the  state.  This 
effect,  when  it  is  realized,  is  to  be  credited  in  part  to 
laws  which  will  never  be  enacted.  The  merely  po- 
tential law  —  that  which  the  people  will  probably  de- 
mand if  they  are  greatly  provoked,  but  not  otherwise 

—  may  be  a  stronger  deterrent  than  the  prospect  of 
more  moderate  legislation.  In  generaLa  consideniblc 
part  of  the  economic  lawmaking  of  the  future  will 
undoubtedly  be  called  out  by  tleiuands  for  action  that 
is  too  violent  to  be  taken  except  under  great  provo- 
cation. The  dread  of  the  extreme  penalty  insun^s 
a  cautious  policy  in  increasing  charges  which  have 
been  est-iblished  under  a  transient  rcgime  of  competi- 
tion. Partial  monopolies  adhering  to  rates  many  of 
which  were  established  under  the  pressure  of  competi- 
tion —  such  are  the  railroad  systems  of  .\merica.  The 
existing  condition  shows  some  of  the  effects  of  compe- 
tition which  has  ceased  and  of  legislation  which  hns 
not  taken  place.  As  the  coird)inations  shall  becornt; 
greater  and  stronger,  the  situation  everywhere  will 
become  more  and  more  akin  to  that  which  existed  in 
a  local  way  when  a  single  line  of  railroad  had  no 
effective  competition,  and  the  charges  which  the  traffic 
would  bear  were  fixed  in  the  way  we  have  describ<*d 
and  absorbed  the  place  value  which  the  carry ing 
created.    It  is  a  method  which  exposes  the  public 


,V    RAILROAD    PROBLEM 


439 


to  an  extortion  vhich,  though  not  unlimited,  is  un- 
endurably  great.  Consolidation,  therefore,  means 
the  control  of  rates  by  the  state;  but  it  Is  essential 
that  this  control  \>o  exercisinl  with  due  regard  for  tlie 
economic  principles  Nvhich  rule  in  tliis  department  of 
industry.  Thus  only  can  tlier(>  be  secured  tlie  re- 
sults of  a  natural  system  unperverted  ivy  monopoly. 
The  principles  which  a  study  of  simpk  ca*^es  suffices 
to  establish  arc  as  follows :  — 

1.  Freight  charges  are  essentially  a  variety  of  price. 
They  express  the  exchange  value  of  place  utility. 

•>  The  static  standards  or  norms  toward  which 
these  prices  tend  are  fixed  in  the  same  way  as  are 
other  static  standards  of  value,  -  by  a  nil.'  of  cost, 
-though  in  the  case  of  railroads  the  working  of  this 
rule  is  exceptional. 

3.   When  carrying  is  done  by  simple  m(>an:    uid  hy 
competing  carriers,  the  ultimate  basis  of  charg.-s  is 
the  cost  of  the  carrying;  and  this  is  estimat.'d  in  the 
simple  way  in  which,  undc-r  perf.rtly  free  competi- 
tion, the  cost  of  making  cmmodities  is  estimated. 
The  total  outlay  is  charged  against  the  total  pro.lu(i. 
4    A  single  railroatl  U-tween  om'  pi.int  and  anoth'-r, 
when  it  is  not  affected  by  tlu'  rivalry  of  any  other  rail- 
road, can  get  for  its  service  th.'  diff.-rence  b.-tw.rn 
the  cost  of  goods  at  the  i)lace  where  they  ar.>  made  an.l 
the  cost  at  the  point  of  d.-livry.  on  ^he  supposition 
that  they  would  either  Im^  made  at  this  p..mt  or  earn,  d 
thither  by  more  primitive  means,     rn.l.r  such  a  i  ar- 
tial  nionop..ly  tlu-  c<.st  incurred  by  thr  railroad  its.lf 
do  not  directly  set  the  standard  of  lis  charges,  oi 

other  costs  do  so.  . 

.5.    In  this  case  the  so-called  variable  costs  incur iv,| 
by  the  railroad  furnish  a  minimum  limit  below  whirl. 


ti  t'lti 


440 


ESSENTIALS   OF    ECONOMIC  THEORY 


m 


ti:* 


ft 


its  charges  cannot  go,  but  to  which  they  tend  to  go  in 
the  case  of  traffic  which  cannot  otherwise  be  secured. 

6.  This  place  value  which  the  railroad  ci\n  confer  on 
the  goods  is  small  (1)  when  the  cost  of  making  the 
goods  at  their  place  of  departure  is  not  much  less 
than  that  of  making  ;hem  at  their  place  of  destination, 
or  (2)  when  it  is  not  much  less  than  the  cost  of  ob- 
taining them  from  a  third  point,  or  (3)  when  it  is 
possible  to  carry  them  from  the  place  of  their  orif^in 
to  their  destination  by  water  or  by  any  other  cheap 
means  of  transportation. 

7.  Variable  costs  are  positive  additions  to  the  total 
outlays  previously  incurred  by  a  railroad,  and  they 
result  from  adding  a  definite  amount  to  its  previous 
traffic.  They  are  less  than  proportionate  parts  of  total 
costs,  including  interest,  some  part  of  ojM'rating  ex- 
penses, cost  of  maintenance  of  roadway,  etc. 

8.  The  comparative  smallness  of  the  variable  costs 
is  chiefly  due  to  the  act  that  the  carrying  capacity  of 
railroads  is  only  partially  used.  These  costs  l)econi(' 
relatively  larger  as  traffic  increases,  and  would  prac- 
tically coincide  with  proportionate  shares  of  total 
costs  if  the  traffic  should  reach  its  absolute  maximum. 

9.  If  the  place  value  above  defined  is  large  enoujih 
to  cover  the  variable  costs  attaching  to  certain  traffic 
and  afford  any  surplus  whatever,  the  railroad  usually 
takes  this  traffic. 

10.  On  the  business  which  it  gets  the  charges 
vary  widely  and,  as  it  appears,  capriciously,  but  they 
arc  at  lM)ttorn  governed  by  the  economic  princij^lc 
stated  —  that  of  place  value  as  established  in  ways  in 
which  the  charges  of  the  railroad  itself  do  not  figure 

11.  <^'ompctin}:  railroads  tend  to  bring  rates  <|(nvn- 
ward  toward  a  iiiinimum  which  is  fixed  by  the  merely 


THE   RAILROAD    PROBLEM 


441 


variable  costs  of  the  carrying  as  done  by  one  or  more 
of  the  railroads  themselves. 

12.  The  competition  between  railroads  is  arrested 
while  they  are  not  using  their  full  capacity,  while  the 
merely  variable  costs  of  an  increment  of  traffic  are 
still  abnormally  low,  and  while  many  rates  are  so. 

1-3.  Railroads  which  compete  for  freight  between 
terminal  points  are  strongly  impelled  toward  con- 
solidation; and  those  which  compete  along  their 
entire  lines  are  forced  to  resort  to  it. 

14.  Consolidation  in  its  more  im[)erfect  forms  tends 
to  establish  rates  that  are  abnormally  high,  but  this 
tendency  is  somewhat  checked  by  the  danger  that  the 
combination  may  be  broken  by  a  desire  to  foster 
business  in  a  section  of  country  and  by  the  indirect 
influence  of  lines  outside  of  the  territory  controlled  by 
the  consolidated  roads. 

15.  In  its  stronger  and  more  extended  forms  con- 
solidation leaves  the  people  with  no  ade(]uate  safe- 
guard against  extortionate  r-harges  except  as  thi.s  is 
furnished  by  the  intervention  of  tlie  state:  and  this 
needs  to  \x  effecte<l  with  an  intelligent  regard  for  the 
natural  forces  which  are  at  work  anuti  the  .seemingly 
capricious  irregularities  in  the  present  system  of 
charges. 

The  Aim  of  Regulation  by  the  State.  —  An  aim  of 
a  government,  in  all  of  its  economic  policy,  is  to 
insure  the  l)est  use  of  the  national  resources,  and  this 
can  often  be  (ione  by  kwping  alive  free  competition. 
Where  the  rivalry  of  producers  is  active,  a  law  of 
survival  guarantees  that  the  more  economical  method 
of  producing  an  article  shall  displace  the  inferior  one. 
When  the  choice  lies  Ix'tweeii  using  a  tjuantity  of  free 
and  disposable  labor  in  making  goods  in  a  certam 


I: 


?-« 


442 


ESSENTIALS   OF    ECONOMIC   THEORY 


U  ' 


m  I 


market  and  using  it  in  making  them  elsewhere  and 
carrying  them  to  the  market,  the  alternative  which 
gives  society  the  most  that  it  can  get  by  any  use  of 
its  protluctive  resources  is  the  one  that  is  spontane- 
ously selected. 

How  an  Extortionate  Local  Charge  may  sometimes  be 
reduced  without  Injury  to  a  Railroad.  —  A  low  charge 
for  freight  carried  from  A  to  B  coupled  with  an  extor- 
tionate one  from  A'  to  B  might  preclude  making  the 
goods  at  A',  though  they  can  !«  made  there  at  excel- 
lent advantage  and  the  interests  of  society  will  soon 
require  that  they  l»e  so.  This  situation  can  exist 
only  so  long  as  traffic  is  slight  between  A  and  A'  and 
greater  between  A'  and  B.  Tlie  growth  of  traffic 
over  the  former  section  of  the  route  will  make  it 
desiral)le  for  the  railroad  to  raise  its  rate  over  that  por- 
tion.   If,  under  compulsion  or  otherwise,  it  reduces 

» Q    the  rate  from  A'  to  B 

sufficiently  to  permit 
the  production  of  the  goods  at  A',  it  will  gain  a  profit- 
able traffic  lietween  A'  and  B  at  the  cost  of  giving  up 
a  relatively  unjjrofitable  one  l)etwwn  A  and  B. 

Variable  Costs  a  Proper  Basis  for  Some  Charges.  — 
It  makes  for  general  economy  to  pay  resjK'ct  to  the 
distinction  l>etween  fixed  and  variable  costs  and  let 
much  freight  b<^  carried  for  anything  it  will  yield  alx)ve 
the  variable  ones.  If  ten  units  of  lal)or  are  required 
for  making  an  article  at  B  and  only  five  at  A,  and  if 
a  railroad  Ijetween  these  points,  whose  capacity  is 
not  fully  utilized,  can  carry  the  article  from  A  to  B 
with  an  expenditure  of  two  additional  units  of  lalx)r, 
then  .society  can  best  get  the  goods  for  use  at  B  by 
spending  these  sevon  units  in  the  making  and  carrying. 
It  would  take  ten  units  to  make  them  at  B,  and  to 


iU 


iHI 


THE    RAILROAD    PROBLEM 


1 1:? 


society  itself  there  is  a  saving  of  thre.    units   from^ 
making  them  at  A  an(i  carrying  them  at  a  special  rate 
to  B.     Till  the  railroad  is  more  fully  used  for  other 
purposes    this    source   of    economy    will    continue 
Though  the  rates  chargetl  for  this  freight  would  bank- 
rupt the  railroad  if  they  were  ai^plied  to  its  entire  tnif- 
fic,  it  is  best  for  the  railroad  to  take  this  special  bit  of 
carrying  at  any  rate  exceeding  the  wages  of  the  two 
units  of  lalwr;  and  for  the  time  being  this  is  the  best 
way  to  use  some  of  the  social  resources,  since  it  gives 
at  the  point  of  delivery  and  us(>  more  goods  for  a  given 
outlay  than  could  have  l)een  had  in  any  other  way. 

Why  Consumers  vmy  suffer  irhile  J'articiilar  Pro- 
ducers may  be  Favoral.-U   will   be  seen   that  this 
principle  affords  an  inducement  for  making  a  special 
classification  of  certain  goods  and  carrying  them  for 
less  than  merchandise  of  a  generally  similar  kind  is 
carried  for.     It  is  a  policy  of  "making  trallic"'  which 
costs  little  and  is  worth  more  than  it  costs  both  to  the 
carrier  and  to  society.    This  incentive  for  reducing 
charges  does  not  operate  as  strongly  in  the  c;i.se  of 
goods  carried  to  consimiers  who  are  forced  to  live  on 
the  route.     They  are  held  there  i)y  the  general  cavL-^es 
menti(med  at  the  beginning  of  the  prece.ling  ehapter. 
and  must  pay  the  tax  wliich  the  railroad  imposes  on 
them.    The  only  limit  on  this  tax  is  the  possibility  of 
otherwise  procuring  the  goods  or  of  moving  out   of 
the  territory.     The   ultimate   po>sibility   that    popu- 
lation may  not  grow  under  a  regime  of  extortion  un-l 
that  both  freight  tratlic  and  pa,s.senger  traflic  may  be 
lu'ld  within  small  limits  imjKtses  some  eheck  on  tlie 
railroad's  exactions.     The  company  may  find  it  worth 
while  to  foster  to  some  extent  the  growth  of  popula- 
tion; and  \o  favor  producers  of  certain  goo<ls  in  order 


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444 


ESSENTIALS  OF  ECONOMIC  THEORY 


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to  induce  them  to  locate  their  establishments  on  its 
line,  antl  the  result  of  this  may  be  good  for  society; 
but  there  is  no  way  of  securing  a  general  good  from 
the  heavy  tax  on  the  rest  of  the  traffic  unless  this  has 
been  necessary  to  insure  the  existence  of  the  railroad 
itself.  In  that  case  there  may  be  a  temporary  neces- 
sity for  it,  which  will  disappear  as  traffic  grows. 

The  Polio/  of  the  State  in  Dealing  with  Low  Charges 
based  on  Variable  Costs.  —  The  interest  of  railroads 
which  have  a  monopoly  of  their  routes  is  to  advance 
the  rates  on  through  traffic.  We  have  noticed  a  pos- 
sible case  in  which  some  equalization  of  charges  by 
occasional  reductions  of  local  rates  takes  place.  An 
increase  of  charges  over  long  routes  not  made  nec- 
essary by  any  pressure  of  business  which  overtaxes 
the  railroad's  carrying  power  would  of  course  be  in- 
jurious. Moreover,  carrying  full  loads  does  not  con- 
stitute such  an  overtaxing  as  calls  for  the  higher  rates. 
There  are  times  when  present  supplies  of  cars  and 
engines  may  not  be  able  to  move  more  freight  than 
thr  do;  but  in  that  case  more  of  them  arc  called  for. 
Oi  V  when  the  point  is  reached  at  which  providing 
fr  his  through  traffic  in  addition  to  the  local  freight 
Is  additions  to  the  permanent  plant  and  involves 

i.sLs  that  exceed  the  return  from  the  through  busi- 

•ss,  is  it  justifiable,  in  the  interest  of  social  efficiency, 
to  advance  such  charges.  In  preventing  such  an 
advance  under  other  conditions  a  government  helps 
to  secure  an  approach  to  a  natural  economy  and  a 
maximimi  of  production. 

When,  in  the  Interest  of  General  Productivity,  a  Re- 
diictimi  of  Local  Charges  is  called  for.  —  W'e  saw  that 
carriers  of  a  priinitive  kind  competing  with  each 
other  would  put  every  charfic  local  or  otherwise,  on  a 


~:i.-ia  ^^iKS 


THE  RAILROAD   PROBLEM 


445 


basis  of  its  proportionate  share  of  total  costs.    The 
traffic  as  a  whole  would  return  enough  to  cover  all 
the  outlays,  and  each  part  of  it  would  yield  its  share 
This  is  the  ideal  of  effectiveness  for  railroads  as  wel 
as  for  ships  and  wagons.    The  attainment  of  the  .deal 
without  a  regulation  of  charges  by  the  state  is  never 
to  be  expected.    One  feature  of  this  normal  condition 
is  that,  where  no  special  improvements  have  recently 
been  made,  total  returns  should  just  ecjual  total  costs, 
in  the  sense  in  which  terms  are  used  in  static  theory  - 
that  sense  in  which  all  interest  charges  and  all  expenses 
of  management  figure  among  the  costs.     No  net  proh 
for  the  entretrren.ur,  but  full  interest  for  the  capitalist 
and  full  wages  for  all  varieties  of  lal)or,  is  the  rule 
that  gives   the  static   measure   of   normal   returns 
If  a  state  shall  slowly  reduce  the  charges  for  local 
freight,  while  holding  unchanged  those  for  through 
traffic-all  the  while  allowing  the  total  returns  o 
the  railroads  to  c(wer  what  we  have  dehne.!  as  total 
costs,-it  will  do  all  it  can  towanl  securing  an  ap- 
proximation to  the  condition  which  affords  the  larges 
product  of  social  industry.     It  will  help  to  n.ake  the 
resources  of  the  people  do  their  utmost  in  yielding  an 
income.    Total  returns  cov.«ring  all  costs,  a  reduction 
of  those  charges  on  local  traffic  whi.h  have  prevcntcnl 
i„.lustries  fro.n  springing  up  at  intenucd.ate  points 
between  favon.l  cnL-rs.  a  gradual  in.;n>a..e  of  Uu-al 


production  without  any  I 


itivc  repression  of  produc- 


....  h"  an-  some  features  of  the  gen- 
ii the  future  should  bring  and  which 


tion  elsewhere       su( 
eral  change  which  tl 
only  the  power  of  the  state  can  in.ike  it  hnng. 
How  the  State  may  secure  what  Competdion  m 


iiren 


in  Other   Fields. 

of  entrepreneurs  carries  prices 


In   general   industry   the   rivalry 


to  a  level  lixed  by  costf 


446 


ESSENTIALS   OF  ECONOMIC  THEORY 


[fit 

mi 


but  in  transportation  the  rivalry  has  so  largely  dis- 
appeared as  to  prevent  such  an  outcome.    The  state 
cannot  restore  much  of  the  vanished  rivalry  and 
would  cause  an  unnatural  condition  if  it  did  so.    We 
have  seen  toward  what  an  abnormal  level  of  costs  a 
sharp  "freight  war"  carries  rates.     What  the  state 
can  do  is  something  which  an  instinctive  judgment 
of  the  people  is  impelling  it  to  do;  namely,  to  adjust 
rates  directly  and  bring  them  gradually  toward  the 
standard  to  which  competition,  if  it  were  working  as  it 
elsewhere  works,  would  automatically  bring  them, 
namely,  that  at  which  wages  and  interest  are  fully 
covered.    A  surplus  above  these  outlays  could  always 
be  temporarily  secured  wherever  a  special  economy  had 
been  effected,  and  the  source  of  legitimate  profit  would 
be  open  to  carriers  as  it  is  to  producers  generally.    How 
much  should  Ix'  reckoned  as  interest  depends  on  the 
question  how  the  capital  itself  is  estimated,  and  here 
again  the  in.stinct  of  the  people  has  been  correct.     It 
will  not  acct'|)t  as  a  measure  of  true  capital  the  market 
value  of  all  the  stocks  and  bonds  the  railroaii  has 
issued.     The   quotations   of   the   market   make   the 
total  values  of  the  stocks  and  bonds  equal  a  capital- 
ization of  its  total  earnings,  and  these  may  include 
a  profit  due  to  monopoly.     If  a  state  were  to  figure 
the  capital  in  this  way,  and  then  no  adjust  rates  as  to 
allow  ordinary  interest  on  the  sum  thus  computed,  it 
would  merely  leave  total  returns  as  they  are.     It 
might  change  comparative  charges,  but  not  the  sum 
total  of  ail  of  them. 

How  Capital  should  be  Estimated.  —  In  that  static 
condition  in  which,  as  we  have  shown,  capital  is 
as  product iv(>  in  one  .sul)grf)up  as  in  another,  the 
capital   is   first   men     ivd   in-  the  cost   of  tlic  goods 


THE   RAILROAD   PROBLEM 


447 


that,  in  the  inception  of  the  industry,  embody  it, 
and  in  static  studies  this  cost  is  regarded  as  constant. 
Returns  from  different  outlays  are  equalizcii,  and 
a  dollar  invested  in  one  kind  of  business  then  yields 
as  much  in  a  year  as  a  dollar  in  any  other.    In 
a  dynamic  state  the  cost   standard  still   prevails, 
and   as   the   tools  of   production   bt><:ome   cheaper, 
in  terms  of  labor,  it  takes  more  of  them  to  represent 
the  same   amount   of   capital   that   was   originally 
invested.    What  it  would  at  any  time  cost  to  du- 
plicate every  item  in  the  equipment  of  a  business 
measures  the  capital  it  uses.    Nothing  but  a  failure 
of  competition  in  the  case  of  railroads  prevents  the 
application  of   this    standard  to  them.     Monopoly 
makes  earnings  more  or  less  independent  of  sums 
invested    and    causes    purchasers   to    buy    stock  at 
rates   that  are  independent  of  costs  of  plant  and 
etjuipment  and  arc  fixed  by  earnings  themselves. 

The  Proces>i  of  Edimatimj  Capital  on  the  Basis  of 
Cost.  —  If  we  undertake  here  to  do  by  public  author- 
ity  what   competition   elsewhere   tends   to   do,   we 
shall  have  to  restore  the  standard  based,  not  on  the 
original  cost  of  the  railroad's  substantial  property, 
but  on  the  cost  of  getting  another  that  would  be 
c(iual    to    it    in    working   efhcicncy.     The    plant    is 
worth   what   it   would   naturally   cost  to   duplicate 
it;    and  an  average  rate  of  interest  on  that  sum  is 
the  natural  return  from  it.     Th(>re  are  ethical  claims 
which  are  cntitlc.l  to  respect  and  which   pr(>clude 
any  sudden  reduction  of  the  value  of  a  railroad's 
pn.perties;    and,  moreover,  the  end  in  view  can  be 
attained   in   a   way   that   will   not   necessarily   take 
anvthing  from  the  a'osolute  amount  which  they  are 
now    worth.     If  the  amount  of   dividends  remains 


k« 


448 


ESSENTIALS  OF  ECONOMIC  THEORY 


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ill 


fixed,  the  increase  in  the  actual  value  of  the  plant 
itself  will  bring  these  <livi(lenils  into  the  proper 
ratio  to  it.  The?  land  that  the  companies  use  Is 
becoming  more  valuable.  Measured  by  what  it 
would  cost  to  duplicate  it,  it  represents  a  larger 
and  larger  amount  on  the  companies'  inventories. 
If  the  equipment  also  is  enlarged  as  traffic  grows, 
the  entire  sum  on  which  interest  and  dividends 
are  computed  tx'comes  continually  larger.  If  the 
interc'st  and  dividends  earned  by  the  plants  now 
in  existence  remain  fixed  in  aliaolute  amount,  they 
will  become  a  smaller  and  smaller  jwrcentage  of 
the  real  capital  of  the  companies.  Merely  letting 
railroads  earn  the  amount  that  they  do  at  present 
would  bring  the  net  incomes  after  some  years  to 
the  same  rate  —  the  same  percentage  of  investetl 
capital  —  that  the  income  from  other  capital  repre- 
sents. New  plants  and  enlargements  of  old  ones 
should  be  allowed  to  earn  enough  to  furnish  iin 
incentive  for  providing  them  as  fast  as  the  needs  of 
the  public  re(|uire  it. 

How  Insuring  a  Fixed  Amount  of  Total  Eamiiuis 
would  affect  the  Rates  charged  for  Freight.  —  It 
goes  without  .saying  that  the  general  increase  of 
traffic,  while  the  freight  chargj's  remain  the  same, 
increases  the  net  earnings  of  the  carrying  companies. 
Therefore  the  policy  of  keeping  the  net  earnin>,'s 
at  a  fixed  total  amount  would  mean  a  reduction 
of  rates  for  freight  and  pa.s.senger  service.  We 
do  not  here  raise  the  question  how  much  reduction 
will  bt!  reijuired  for  the  purpose  in  view  —  that 
of  transferring  to  the  j)eople  at  large  whatever  now 
constitutes  a  genuine  monopoly  pr<)fit.  Tn  the 
case  of  some  'ines  there  is,  it  is  safe  to  say,  no  such 


THE  RAILROAD   PROBLEM 


449 


profit,  and  it  will  be  impossible  to  tell  how  inuch 
of  it  elsewhere  exists  till  some  careful  appraisal  of 
plants  and  eiiuipments,  on  the  basis  of  the  cost  of 
duplicating  theuj,  shall  have  been  made.  What 
we  neeil  to  know  is  that,  by  the  aitl  of  such  an  ap- 
praisal, the  state  can,  if  it  will,  secure  in  the  de- 
partment of  carrying  the  result  which  is  automati- 
cally secured  elsewhere,  namely,  the  prevalence  of 
charges  which  afford  normal  returns  on  invested 
capital  as  well  as  wages  for  every  kind  of  labor. 

FAements  of  tfie  Problem  not  included  in  a  merely 
Ecmomic  Study.  —  It  will  not  fail  to  occur  to  any 
reader  that  in  making  the  present  study  of  railroads 
a  very  general  and  purely  economic  one  we  leave 
out  of  account  some  facts  of  great  importance.     We 
take  no  account  of  corruption  within  the  corpora- 
tions which  do  the  carrying,  nor  of  corruption  in 
the  relation  between  them  and  the  oflicials  of  the 
state.    Stockholders  within  the  corporation  are  likely 
to  have  their  interests  betrayed  by  those  who  are 
apiKjinttHi  to  take  charge  of  them,  and  citizens  of 
the  state  are  likely  to  have  their  greater  interests 
betrayed,   in   a    like  manner,    by   their    appointed 
custodians.    We   cannot   here   discuss   the    various 
plans  by  which  directors  plunder  their  own  corpora- 
tions, nor  the  ways  in  which  public  officials  betray 
the    i)eople.     All    of    these    abuses    are    disturbing 
Influences  in  the  economic  system;   and  all  of  them 
Interfere  with  the  adjustment  which  gives  the  highest 
productive  efficiency,   and   contribute   a  full   share 
toward  putting  the  social  order  in  danger.    All  are 
however,  so  obviously  criminal,  if  they  are  judged 
by  the  spirit  of  the  law,— not  to  say  by  the  letter  of 
it,— that  it  is  better  to  leave  the  discussion  of  the 


2o 


** 


UJ^!i 


t^^ 


MICROCOPY   RESOIU  tON   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


1.0    [f'-  « 


1.1 


2.8 
3.2 

116 

14.0 


2.5 
2.2 

2£ 
1.8 


1.25 


^  /APPLIED  INA/1GE     Inc 

=^  1653   East    Moin   Slr.-sl 

Ks  Roche^lc',    Ne«   York        '4609       USA 

i^S  (716)  482  -  0300  -  Phone 

SS  (716)   28B  -  5989  -  Fax 


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ESSENTIALS  OP  ECONOMIC  THEORY 


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mode   of   suppressing  them  to  legal   and   political 
science. 

A  Practical  Mode  of  Insuring  an  Approach  to 
Normal  Rates  for  Transportation.  —  When  compe- 
tition rules,  it  enlarges  the  supply  of  a  dear  article 
till  the  price  of  it  is  normal,  and  it  increases  the 
capital  in  a  profitable  business  till  its  earnings  be- 
come so.  In  the  case  of  railroads  this  does  not 
automatically  take  place,  but  the  result  of  it  all  — 
adequate  service  and  normal  charges  for  it  —  can 
be  directly  secured  by  the  state.  Charges  that 
have  been  made  reasonable  by  competition  may 
be  left  as  they  are,  and  those  that  are  dispropor- 
tionately high  may  be  gradually  lowered.  The 
growth  of  traffic  may  be  trusted  to  keep  the  total 
earnings  of  the  companies'  present  plants  at  the 
amount  at  which  they  now  stand,  in  spite  of  these 
reductions  of  rates;  and  enlargements  of  the  plants 
may  be  permitted  to  earn  further  sums  which  will 
attract  capital  and  keep  the  service  abreast  of  the 
public  need.  All  this  will  require  expert  skill  of 
a  very  high  order.  For  the  purpose  of  the  present 
work  it  is  enough  to  say  that  such  a  course  as  this 
is  the  only  one  which  will  insure  in  transportation 
the  results  which  competition  elsewhere  yields. 
It  will  secure  both  rates  and  service  which  the  civil 
law  calls  "reasonable"  and  economic  law  calls 
"  natural." 


CHAPTER  XXV 

ORGANIZATION   OF   LABOR 

What  an  economist  wishes  first  to  know  con- 
cerning the  organization  of  labor  is  whether  it  is 
a  natural  phenomenon  which  should  be  welcomed 
and  left  to  itself.  Does  it  help  to  establish  wages 
on  the  basis  of  the  productivity  of  labor,  and  does  it 
do  it  without  much  reducing  that  productivity  ?  We 
shall  find  that  it  works  both  well  and  ill  in  these  par- 
ticulars and  needs  close  study  and  careful  regulation. 
What  laborers  themselves  ask  concerning  the 
organization  of  men  of  their  class  is  simply  what 
power  it  has  to  raise  their  own  wages;  and  we  shall 
shortly  find  that  it  has  a  certain  power  when  it  does 
not  invoke  the  principle  of  monopoly  and  a  much 
larger  power  when  it  does  so.  We  shall  find  that 
the  benefit  from  mere  organization  may  be  extended 
to  the  great  majority  of  laborers,  while  that  which 
depends  on  monopoly  is  confined  to  relatively  few  and 
involves  an  injury  to  the  remainder. 

The  Static  Standard  of  Wages  of  Unorganized 
Labor.  — In  that  static  state  toward  which  society 
is  always  tending,  and  in  which  the  normal  standard 
of  wages  is  completely  realized,  men  are  supposed 
to  get  all  that  they  produce.  The  law  of  marginal 
productivity  of  labor  works,  as  it  were,  in  vacuo, 
and  gives  an  ideally  perfect  result.  Every  unit  of 
labor  receives  what  a  marginal  unit  produces. 
Actual    Pay    of    Lbiorganized    Labor.  —  A    static 

451 


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ESSENTIALS   OF   ECONOMIC   THEORY 


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assumption  excludes  enforced  idleness  on  the  part 
of    able-bodied    men.    The    changes    which    throw 
such  men  out  of  employment  are  not  taking  place, 
and  there  is  no  reserve  of  efficient  but  idle  labor! 
In  the  actual  state,  which  is  highly  dynamic,  such 
a  supply  of  unemployed  labor  is  always  at  hand, 
and  it  is  neither  possible  nor  normal  that  it  should 
be   altogether  absent.    The   well-being   of   workers 
requires  that  progress  should  go  on,  and  it  cannot 
do  so  without  causing  some  temporary  displacements 
of  laborers.    Though  no  indivitlual  were  long  out 
of   employment,  — though    a    particular   man  were 
m  this  condition  only  briefly  and  during  the  period 
occupied  by  a  transit  from  one  occupation  to  an- 
other,—there  would  always  be  in  the  general  market 
some  unemployed  men.    If  we  throw  out  of  account 
those  who  are  idle  because  of  personal  disabilities. 
It  will  remain  true  that  really  efficient  men  can 
nearly  always  be  had,  if  only  a  few  are  at  one  time 
needed.    The  presence  of  even  a  few  men  able  to 
do  good  work  and  not  able  to  get  employment  is 
often  sufficient  to  make  individual  bargaining  work 
unfairly  to  the  laborer.    When  the  employing  of 
one  man  is  in  question,  the  employer  has  other  alter- 
natives, and  the  man  may  not  have  them.    The 
employer  may  much  more  readily  set  men  bidding 
against  each  other  for  a  vacant  place  than  any  of 
the  men  can  set   employers   bidding  against  each 
other  for  an   idle   man.    This  strategic   inequality 
between  the  parties  in  the  wage  contract  becomes 
greater  as  the  supply  of  unemployed  men  becomes 
larger.    At  some  times  and  places  it  may  force  the 
pay  of  many  workmen  downward  toward  a  minimum 
set  by  what  the  unemployed  will  consent  to  take. 


•t.  ,       -IfcV       r. 


u*'?^  2.^^UMr—^» 


ORGANIZATION    OF    LABOR 


453 


TAe  Effect  oj  Local  Organization.  —  Organization 
means  collective  bargaining  and  tends  to  equalize 
the  strategic  positions  of  men  and  employers.  Where 
an  entire  force  of  workers  must  be  dealt  with  at 
a  time,  the  employer  has  not  the  alternative  ready 
to  his  hand  which  he  would  have  if  he  had  only  to 
employ  a  single  one.  If  his  employees  strike,  he 
cannot  at  once  secure  another  force  large  and  effi- 
cient enough  to  meet  his  needs.  If  his  men  allow 
their  places  one  by  one  to  be  filled,  the  strike  will 
be  disastrous  to  them,  indeed,  but  it  will  also  be 
a  misfortune  for  the  employer.  His  new  force  will 
be  inferior  to  his  old  one,  first,  because  many  of 
the  new  men  will  be  personally  inferior  to  the  old 
ones,  and  secondly,  because  as  a  body  they  lack 
effective  training  and  will  not  work  together  as 
efficiently  as  did  the  old  force.  He  can  afford  to 
pay  for  the  disciplined  workers  the  amount  that 
the  new  force  will  produce  with  two  plus  marks 
attached  —  one  representing  the  superior  personal 
quality  of  the  former  employees  and  the  other  rep- 
resenting the  value  of  discipline.  In  other  words, 
he  can  afford  to  make  two  dist'nct  additions  to  the 
amount  that  unemployed  men  are  worth  to  him  in 
order  to  retain  his  old  employees.  This  is  on  the 
supposition  that  it  is  possible  to  gather  from  the 
force  of  idle  men  enough  to  operate  a  single  estab- 
lishment. Without  organization  and  by  means  of 
individual  bargaining,  wages  are  drawn  downward 
toward  the  level  set  by  what  idle  men  will  accept, 
which  may  be  less  than  they  will  produce  after  they 
receive  employment  and  will  surely  be  less  than 
they  will  produce  after  they  have  developed  their 
full   efficiency.    With   organization    which    is    local 


I 

I 

I 


I 


454 


ESSI  VTIALS   OF   ECONOMIC   THEORY 


only,  and  with  collective  bargaining  that  goes  only 
to  the  extent  of  adjusting  the  pay  of  men  in  one 
establishment,  this  pay  comes  nearer  to  the  standard 
set  by  the  productivity  of  labor  than  it  would  if 
bargains  were  individually  made.  The  employer 
balances  in  his  mind  the  value  of  a  new  and  raw 
force  and  the  value  of  a  selected  and  disciplined 
force,  measures  the  difference  between  these  values, 
and  will  often  pay  a  rate  that  is  between  the  two 
amounts  and  under  average  conditions  is  likely  to 
approach  the  larger  of  them. 

Wages  as  adjusted  by  a  General  Organizatim  of 
Labor  in  a   Svbgroup.  —  Where   organization   goes 
to  the  length  of  uniting  all  the  employees  in  a  partic- 
ular industry  or  subgroup,  the   situation  is  unlike 
the  foregoing  in  an  important  particular.    No  quick 
filling  of  the  places  which  the  men  may  vacate  with 
altogether  new  workers  is  possible.    The  employers 
are  not  so  situated  that  they  can  compare  the  old 
force  with  a  new  one,   measure  the  difference  in 
their  values,  and  govern  their  conduct  accordingly. 
The  training  of  an  entirely  new  force  is  indeed  a 
remote  possibility,  if  the  business  can  wait  for  it, 
but  it  can  seldom  do  this;   and  a  strike  that  runs 
through    a    subgroup    presents    to    employers    the 
alternative  of  winning  the  workers  by  concessions  or 
allowing  their  business  to  stop.    If  it  stops,  it  be- 
comes a  question   of  endurance   between  the  em- 
ployer and  the   employees,  in  which  the  employer 
has  the  advantage  so  long  as  the  public  does  not 
mterfere.    We  shall   recur  to  this  condition  when 
we  study  the  effectiveness  of  strikes  and  boycotts 
under  various  conditions.     Under  all  three  of  the 
conditions  we  have  just  described,  the  static  standard 


ORGANIZATION   OF    LABOR 


455 


of  wages  —  the  final  productivity  of  nocial  labor  — 
still  exists ;  and  the  actual  pay  of  labor  tends  toward 
it,  but  differs  from  it  by  varying  amounts,  accord- 
ing as  labor  is  unorganized,  locally  organized,  or 
organized  throughout  a  subgroup.  In  the  first 
case  the  worker  may  get  materially  less  than  the 
standard  amount;  in  the  second  case  he  may  get 
something  closely  approaching  it;  and  in  the  third 
case,  for  reasons  to  which  we  shall  later  give  atten- 
tion, he  may  be  able  to  got  the  full  amount  and 
somewhat  more.  A  particular  employment  which 
is  strongly  organized  and  which  makes  the  utmost 
use  of  its  organization  is  often  able  to  carry  the  pay 
of  its  employees  to  a  level  that  is  distinctly  above 
that  set  by  the  productive  power  of  marginal  social 
labor.  Nevertheless,  the  amount  of  this  overplus 
which  the  favored  worker  gets  is  limited,  and  the 
standard  fixed  by  marginal  productivity  is  one  on 
which  the  pay  of  these  workers  and  of  all  others 
depends,  though  it  may  not  coincide  with  it. 

The  Power  of  a  Universal  Organization  of  Labor. 
—  In  the  days  when  the  wages  fund  theory  held 
sway  it  was  believed  that  organization  could  not 
materially  advance  the  interests  of  labor  as  a  whole, 
since  it  could  not  add  anything  to  the  fund  which 
was  destined  in  any  case  to  be  divided  among  the 
laborers.  Now  that  another  theory  of  wages  is 
generally  held,  it  is  still  clear  that  what  organization 
can  do  for  the  entire  working  class  is  limited.  By 
no  possibility  can  it  insure  a  rate  of  pay  that  will 
permanently  exceed  the  product  of  labor,  since 
employers  would  then  be  interested  in  reducing 
the  number  of  their  workmen  and  so  raising  their 
product  per  capita  to  the  level  of  their  pay.    This 


H 


456 


ESSENTIALS   OF   ECONOMIC   THEORY 


would  result  in  a  large  force  of  idle  laborers,  whose 
competition   would    have   its   depressing   effect   on 
the  labor  market.    Up  to  the  natural  limit  set  by 
the  specific  product  of  labor  a  universal  organiza- 
tion might  successfully  carry  its  demands.    More- 
over, this  result  would  require  no  use  of  force  —  no 
"slugging"  of  non-unionists,  since  there  would  be 
none  to  be  slugged.    The  mere  fact  of  a  universal 
organization  maintaining  discipline  and  prev     :;ing 
breaks  within  its  own  ranks  would  suffice  for  the 
end  in  view  — the  maintenance  of  pay  that  should 
conform  to  its  natural  standard.    The  supposition 
of  a  universal  organization  of  labor  has  at  present 
only  a  theoretical   interest.    What  society   has  to 
deal  with  is  an  organization  that  includes  a  small 
minority  of  workers  and  is  composed  of  separate 
unions  which  are  endeavoring  each  to  promote  the 
interests  of  the  men  of  its  own  craft.    It  is  a  type 
of  organization  which,  instead  of  uniting  all  work- 
ers, makes  the  sharpest  division  between  those  in 
the  unions  and  those  outside  of  them,  and  creates 
a  lesser  opposition    between    the  different    unions 
themselves. 

Organized  Labor  and  Monopoly.  —  Actual  trade 
unions  do  not  always  rely  upon  mere  collective 
bargaining.  They  sometimes  aim  to  secure  a  partial 
monopoly  of  their  fields  of  labor;  and  as  it  is  impos- 
sible to  do  this  if  unemployed  men  or  men  from 
other  fields  of  employment  are  free  to  enter  their 
territory,  they  must  be  kept  out  of  it.  They  can 
only  be  kept  out  by  some  use  of  force,  and  coercion 
applied  by  the  workers  in  a  well-paid  field  to  the 
men  who  seek  to  enter  it  during  a  strike  is  a  part 
of  the  strategy  of  trade  unions. 


M^^^^^^^^^m^MM 


ORGANIZATION    OF   LABOR 


457 


The  Ground  on  which  the  Use  of  Force  is  Jmtified. 
—  Organized  laborers  claim  a  right  of  tenure  of 
their  positions;  they  claim  to  own  them  much  as 
a  man,  by  right  of  prior  occupation,  owns  a  home- 
stead. They  claim  the  same  right  to  repel  intruders 
from  their  field  of  employment  that  a  man  has  to 
drive  interlopers  from  his  grounds,  "Thou  shalt 
not  take  another  man's  job"  is  a  recognized  com- 
mandment on  which  they  claim  the  right  to  act. 

The  Mode  of  Justifying  the  Use  of  the  Force  in 
Guarding  Vacated  Positions.  —  Coercion  is  a  com- 
prehensive term  and  does  not  always  involve  per- 
sonal assault.  What  it  inflicts  on  the  recalcitrant 
may  range  all  the  way  from  social  opprobrium  and 
boycotting  to  literal  striking,  maiming,  or  killing. 
In  every  case  it  involves  some  injury  and  is  con- 
trary to  the  spirit  of  the  law,  unless  the  right  of 
tenure  can  be  fully  established.  If  the  employer 
has  no  right  to  turn  off  his  men  and  take  new  ones, 
and  if  the  new  ones  have  no  right  to  come  at  his 
invitation,  there  is  a  rude  analogy  between  the 
effort  of  the  non-union  men  to  get  the  places  and 
an  effort  to  get  away  a  man's  farm.  It  is  a  matter 
of  course  that  the  employer  may  rightfully  dis- 
charge men  who  prove  worthless  and  fail  to  render 
the  service  which  is  contracted  for.  The  question 
is  whether  he  has  the  right  to  dismiss  them  when 
they  will  render  the  service  only  on  what  seem  to 
him  exorbitant  terms.  On  this  point  the  verdict 
of  his  own  reason  is  extremely  clear.  To  offer  to 
render  the  service  only  on  exorbitant  terms  has 
the  same  effect  as  to  offer  an  inferior  service  on  the 
original  terms,  and  the  right  of  tenure  which  the 
workingmen  claim,  if  it  exists  at  all,  is  contingent 


» 


m 


458 


ESSENTIALS   OF    ECONOMIC   THEORY 


m 


on  the  rendering  of  effective  service  on  reasonable 
terms.  On  the  supposition  that  they  have  owned 
their  places  at  all  they  seem  to  their  employer  to 
have  forfeited  them  when  they  have  insisted  on 
too  high  wages.  On  this  point,  however,  the  men's 
reason  may  give  an  opposite  verdict,  though  it  is 
based  on  the  same  principle.  To  them  the  terms 
they  insist  on  may  appear  reasonable,  and  they 
then  think  that,  because  thoy  are  so,  their  owner- 
ship of  their  positions  is  valid  and  that  other  claim- 
ants are  usurpers.  Both  parties  in  the  dispute  base 
their  contentions  on  the  supposed  reasonableness  of 
the  terms  they  demand. 

The  Necessity  for  Knowing  what  Terms  are  Reason- 
able. —  A  momentous  question  both  for  society  and 
for  the  working  people  is  whether  there  is  any  way  of 
ascertaining  what  terms  are  reasonable  and  securing 
conformity  to  them.  What  we  shall  find  is  that  it  is 
possible  to  keep  in  view  the  natural  standard  of  wages, 
as  in  an  early  chapter  we  have  defined  it,  and  that  it 
is  possible,  in  the  midst  of  the  struggle  of  massed  cap- 
ital with  massed  labor,  to  secure  a  certain  degree  of 
conformity  to  this  standard.  It  is  possible  so  to 
shape  the  system  that  a  wide  difference  between 
actual  pay  and  standard  pay  will  not  exist,  and  that 
wages  will  everywhere  tend  toward  their  natural 
levels,  as  they  did  under  that  earlier  regime  before 
either  the  capital  or  the  labor  of  a  subgroup  acted 
collectively. 

The  Attitude  of  the  Community  toward  Striking 
Laborers.  —  So  long  as  a  local  community  sympathizes 
with  the  worker's  dread  of  competition  and  tolerates 
his  claim  of  ownership  of  his  position,  it  dc3S  not 
utterly  condemn  and  repress  every  use  of  force  in 


ORGANIZATION    OF    LABOR 


459 


asserting  his  claim.  The  local  public  is  partly  com- 
posed of  friends  or  neighbors  of  the  striking  worker 
and  is  reluctant  to  interfere  with  the  worker's  effort 
to  defend  what  he  considers  his  property  —  that  is, 
his  right  of  employment  in  a  business  to  which  he  is 
accustomed.  The  community  .sympathizes  with  his 
fear  of  the  hardship  which  may  result  when  em- 
ployers freely  utilize  idle  labor  as  a  means  of  defeating 
strikes.  On  the  othf^r  hand,  even  a  local  community 
realizes  that  much  toleration  of  force  means  anarchy. 
If  the  violence  is  not  resisted  or  repressed,  the  strikers 
acquire  a  monopoly  that  is  not  dependent  on  the  jus- 
tice of  their  claims.  The  whole  question  of  reason- 
ableness in  the  terms  demanded  is  forcibly  set  aside, 
and  the  pay  that  is  established  becomes,  not  whatever 
a  calm  verdict  of  disinterested  persons  would  approve, 
but  what  workers  by  brute  force  can  get.  Even  a 
local  public  is  unwilling  to  see  the  .social  order  com- 
pletely subverted  and  mob  rule  substituted,  and  it 
usually  interferes  when  violence  goes  to  that  length; 
but  in  its  unwillingness  completely  to  repress  disor- 
der, on  the  one  hand,  or  to  leave  it  wholly  unopposed, 
on  the  other,  a  local  government  pursues  a  wavering 
policy,  now  repressing  anarchy  and  again  leaving  it 
to  gather  headway.  It  seldom  affords  full  protec- 
tion to  the  non-union  men  who  work  during  a  strike. 
Moreover,  it  is  the  habit  of  state  governments  not  to 
interfere  with  local  affairs  until  the  public  peace  is 
endangered,  and  therefore  not  until  the  coercion  of 
free  laborers  has  gone  to  great  lengths.  The  federal 
government  only  intervenes  in  great  emergencies. 
Non-union  men  working  during  a  strike  are  left  largely 
in  the  hands  of  the  local  community,  which  often 
tolerates  enough  of  violence  to  give  to  strikers  a  meas- 


'r.,  • 

'  'Ik 
*  ■'i< 


f<Mi# 


jU 


mm 

ii 

1 

HI 


460 


ESSENTIALS   OF   ECONOMIC   THEORY 


uro  of  monopolistic  power.  Tho  wavering  policy  of 
the  local  community  in  regard  to  preserving  the  peace 
expresses  a  corresponding  mental  wavering.  The 
public  obeys  no  clear  principle  of  action  in  this  con- 
nection and  merely  allows  some  "slugging"  when  it 
sympathizes  with  strikers,  but  not,  as  a  rule,  when  it 
does  not.  We  have  to  see  whether  this  rule  has  in 
it  any  germ  of  a  legitimate  policy. 

The  Sole  Mode  of  Escape.  —  The  sympathy  in  the 
case  depends,  as  we  have  seen,  on  the  off-hand  im- 
pression of  the  people  as  to  the  reasonableness  of  the 
strikers'  demands ;  and  for  such  an  impression  there 
may  or  may  not  be  an  adequate  ground.     It  is  evident 
that  no  authoritative  verdict  has  in  these  cases  been 
pronounced.    The  only  escape  from  the  intolerable 
situation  which  is  thus  created  is  by  testing  the  equity 
of  the  Lborer's  demands  and  adjudicating  his  claim 
to  a  tenure  of  his  position.    The  possible  method  of 
doing  this  we  will  presently  examine.    It  is  clear  in 
advance  that  what  is  to  be  done  is  to  determine  what 
pay   is   reasonable.    The   worker  cannot   rightfully 
retain  the  ownership  of  his  job  if  he  does  not  work 
properly;    and  he  cannot  so  retain  it  if  he  works 
properly  and  claims  exorbitant  pay.     Fair  dealing 
between  employer  and  employed  must  be  attained  if 
his  tenure  is  even  tacitly  recognized.    The  worker  who 
accepts  a  rate  of  pay  that  is  pronounced  reasonable 
may  safely  be  confirmed  in  his  place  and  protected 
from  any  persecution  on  the  part  of  his  employers. 
The  worker  who  refuses  a  rate  which  some  competent 
authority  has  pronounced  ••easonable  thereby  forfeits 
his  right  of  tenure  in  a  definitive  way.      His  place 
is  clearly  the  i)rnporty  of  whoever  will  take  it,  and  the 
state  is  bound  so  completely  to  preserve  order  as  tq 


ORQAMZATION    OF    LAUUR 


461 


make  a  now  worker  perfeelly  secure  from  injury.  This 
means  that  it  nmst  do  intelligi'ntly  and  thorouj^hly 
what  a  local  community  weakly  tries  to  do  when  it 
lets  strikers  guard  their  positions  if  it  sympathizes 
with  their  cause,  and  represses  such  attempts  when  it 
does  not.  The  sympathy  needs  to  b(!  crystallized 
into  a  clear  verdict  as  to  the  rightfulness  or  wrong- 
fulness of  the  rate  of  pay  demanded,  and  the  local 
toleration  of  violence  in  cases  where  the  men's  ile- 
mands  appear  just  needs  to  become  an  open  and 
frank  assertion  of  their  right  to  employment  on  the 
terms  demanded;  while  the  tardy  repression  of  the 
violence  in  cases  in  which  the  demands  seem  unjust 
needs  to  become  a  prompt  and  complete  repression 
of  it. 

The  Preservation  of  the  Mobility  of  Labor  Indispen- 
sable. —  Any  use  of  force,  anything,  however  slight, 
that  deprives  labor  of  its  mobility,  destroys  the  con- 
dition on  which  the  law  of  wages  is  predicated.  A 
perfectly  free  flow  of  labor  from  point  to  point  in  the 
industrial  system  is  essential  to  a  static  state,  and  to 
any  approximate  conformity  of  actual  wages  to  the 
static  standard  in  a  dynamic  state.  The  plan  which 
divides  labor  into  sections  and  arrays  one  part  of  the 
force  against  another  makes  realization  of  natural 
wages  impossible.  While  all  differences  of  pay 
which  correspond  to  differences  of  productive  power 
are  normal,  those  which  are  based  on  a  monopolizing 
of  fields  of  labor  by  some  and  the  exclusion  of  others 
are  abnormal.  They  cause  the  rich  fields  to  be  sur- 
rounded by  impassable  walls  and  force  the  bulk  of 
the  population  to  work  on  the  outer  and  poorer 
areas. 

The  Wide  Range  of  Difference  between  the  Pay  of 


i 


il 


462 


ESSENTIALS   OP  ECONOMIC  THEORY 


Different  Classes  of  Laborers  under  Trade  Unions.  — 
The  possible  range  of  the  rise  of  pay  which  monopoly 
may  insure  for  certain  laborers  is  far  greater  than 
that  which  any  action  can  secure  for  labor  as  a  whole. 
Mere  collective  bargaining  makes  some  difference, 
indeed,  but  where  there  is  no  attempt  to  exclude 
from  a  favored  field  workers  of  the  poorly  paid  class, 
the  range  of  difference  is  not  great.  To  double  the 
pay  of  laborers  of  every  class  would  require  more  than 
the  entire  income  of  society,  and  yet  it  is  possible  for  a 
few  workers  to  make  as  large  a  gain  as  this.  Some 
organizations  without  monopoly  may  keep  the  actual 
pay  r '  labor  somewhat  near  to  its  theoretical  stand- 
ard. With  monopoly  they  may  carry  it  far  abo-  ^ 
the  standard  set  by  the  marginal  productivity  of 
social  labor. 

The  Differing  Efficiency  of  Organization  as  tn^ed 
against  Different  Classes  of  Employers.  —  When  em- 
ployers are  acting  independently,  a  trade  union  which 
deals  with  them  one  at  a  time  may  very  easily  bring 
the  pay  of  its  members  up  to  a  certain  average  stand- 
ard. A  strike  against  a  single  producer  may  be  very 
disastrous  for  him,  since  it  may  cause  him  to  lose  his 
customers.  If  the  general  state  of  business  is  good, 
he  will  pay  all  that  he  can  rather  than  see  business 
drift  away  from  him,  but  what  he  can  pay  is  some- 
what strictly  limited.  He  cannot  safely  give  more 
than  what  is  given  by  most  of  his  competitors.  Or- 
ganization in  such  a  case  is  a  good  equalizer  of  pay, 
and  as  its  power  is  used  against  different  employers 
successively,  it  suffices  to  raise  general  pay  toward 
or  to  a  standard  set  by  the  productivity  of  the  labor. 
Moreover,  as  a  rulf.  it  can  accomplish  this  without 
any  appeal  to  violence.     A  modest  and 


m 


ORGANIZATION    OF    LABOR 


463 


demand  enforced  by  a  wholly  peaceable  strike  is 
likely  to  be  conceded. 

Tlie  Power  of  a  Strike  against  All  Entrepreneurs 
in  a  Stibgroup.  —  A  strike  against  employers  in  an 
entire  subgroup  may  gain   more  for  the  workmen, 
but  the  more  ambitious  effort  encounters  stronger 
resistance.    The  employers,  we  assume,  are  compet- 
ing still  and  have  not  the  power  which  a  monopoly 
would  give  them  to  raise  the  prices  of  their  products. 
Nevertheless,  they  can  concede  somewhat  r  ore  when 
they  act  together  than  one  of  them  could  concede 
separately.    A  concurrent  raising  of  prices  is  entirely 
possible  without  any  positive  combination  of  the  pro- 
ducers who  follow  such  a  course.    Moreover,  the  strike 
itself,  if  it  continues  for  any  length  of  time,  creates  a 
scarcity  of  the  products  and  a  rise  of  prices.    Though 
the  employers  in  the  end  may  concede  what  their 
workers  demand,  or  some  part  of  it,  the  settlement 
may  not  cost  them  anything,  since  the  advance  in 
prices  may  enable  them  to  take  all  that  they  give  their 
men  out  of  the  pockets  of  the  public.    The  strike 
by  a  trade  union  against  competing  employers  has 
as  one  ground  of  early  success  the  employers'  dis- 
trust of  each  other.    The  danger  is  that  as  soon  as 
prices  become  at  all   firm,  one  or   another  of  the 
employers  may  quickly  make  terms  with  his  men  in 
order  to  seize  the  opportunity  for  new  business.    For 
this  very  reason,  however,  the  range  of  possible  gains 
from  a  strike  running  through  a  whole  subgroup  is 
smaller  than  it  would  be  if  the  employers  were  or- 
ganized, so  that  all  of  them  could  safely  wait  for  a 
larger  rise  of  prices  before  making  terms  with  their 
men.    The  possible  increase  of  pay  without  a  com- 
bination on  the  employers'  side  is  distinctly  larger 


I        I 


!    .      i 


If: 


m 


Mm 


464 


ESSENTIALS  OF  ECONOMIC  THEORY 


than  any  which  a  strike  against  a  single  employer  can 
usually  secure. 

The  Power  of  a  Strike  against  a  Union  of  Em- 
ployers. —  Still  keeping  the  supposition  that  there  is 
no  coercion  invoked  and  that  strikes  are  quite  orderly, 
we  find  that  they  may  gain  more  when  employers  are 
consolidated  than  when  they  are  not  so,  but  that  they 
are  likely  to  encounter  still  greater  resistance.    The 
demand  —  "  Pay  us  more  and  charge  it  to  the  public  " 
—  may  be  conceded,  and  probably  will  be  so  if  the 
employers  dread  the  hostility  of  their  own  men  and 
the  action  of  the  state  in  enforcing  a  resumption  of 
business.    If  they  have  no  such  dread,  their  power 
to  resist  a  strike  is  much  greater  by  reason  of  consoli- 
dation.   They  can  safely  hold  out  long  if  the  public 
will  let  them  do  it.     No  one  of  them  is  in  any  danger 
of  seeing  others  take  his  customers.    Their  hold  upon 
their  constituency  is  secure,  and  their  power  to  tax 
the  constituency  and  make  it  pay  for  whatever  a  strike 
may  cost  is  very  great.    A  strike  under  such  circum- 
stances may  win  much  for  the  men  or  it  may  win 
nothing  whatever,  and  the  difference  between  the.se 
results  is  mainly  determined  by  the  attitude  of  the 
people.     If  the  government  will  hold  its  hands  and  let 
the  producers  work  their  will,  they  may  (1)  allow  the 
strike  to  run  for  a  time,  concede  something  to  their 
men,  and  raise  prices  enough  to  recoup  themselves 
with  a  surplus;  or  else  (2)  they  may  let  the  strike  run 
longer,  till  the  men  are  tired  out,  take  them  back 
without  concessions,  and  still  put  the  same  tax  on  the 
public  as  in  the  other  case. 

Effech'-eness  of  Coercion  as  used  against  Non-union 
Men.  —  As  a  peaceful  strike  has  different  poaRihilities 
according  as  it  is  used  against  a  single  producer,  a  body 


m^&^m 


M.,; 


ORGANIZATION   OF   LABOR 


465 


of  competing  producers,  or  a  consolidation  of  pro- 
ducers, so  coercion  employed  against  independent 
workers  has  correspondingly  different  effects  in  the 
three  cases.  When  it  is  used  in  the  case  of  a  strike  of 
the  first  class,  it  enables  the  men  to  carry  their  point 
more  quickly,  but  does  not  materially  increase  the 
amount  they  can  gain.  If  the  indejjendent  producer 
is  unable  to  run  his  mill  till  he  makes  terms  with  his 
original  workers,  he  will  be  in  greater  haste  to  make 
terms,  but  the  amount  he  can  yield  is  limited  almost 
as  closely  as  before  by  the  prevailing  rate  of  pay. 

In  the  case  of  a  strike  of  the  second  class  which 
runs  through  a  subgroup  in  which  producers  are  still 
without  union,  coercion  adds  greatly  to  what  the  men 
may  gain.  It  may  fix  and  enforce  a  rate  of  pay 
which  all  employers  must  give,  anil  circumstances  will 
compel  them  to  charge  it  to  the  public  in  whole  or  in 
part.  The  marginal  producers  who  have  no  net  profits 
must  charge  the  whole  advance  to  the  public  or  go 
out  of  business,  and  the  result  may  be  that  some  of 
them  may  go  out.  The  advance  in  the  rate  of  pay 
conceded  by  others  may  come  partly  out  of  their  own 
profits  and  partly  out  of  consumers'  pockets. 

With  employers  in  a  great  consolidation  the  possible 
advance  of  wages  is  at  its  maximum.  The  employers 
are  in  a  position  to  charge  to  the  public  all  that  they 
give  to  the  men,  and  more.  If  the  state  allows  them 
to  do  it,  they  may  thrive  by  repeated  strikes.  Whether 
their  men  thrive  or  not  depends  on  their  power  to  bar 
other  labor  from  their  field  and  to  live  without  work 
long  enough  to  induce  their  employers  to  yield. 

The  effect  of  coercion  on  the  wages  of  non-union 
laborers  means  a  lowering  of  their  pav-  It  confines 
them  to  the  less  productive  field  which  is  open  to  them. 

2u 


I* 


U        'I 


466  ESSENTIALS   OF   ECONOMIC   THEORY 

1.    _^_^_    W«ges  of  union  libor  which  mor     olUe»  lU  field  and  dealt  with 
competing  employers. 

Wages  obtainable  by  union 
3.  ^ii^^^^B^^B^^i^^^_i^^_i^__i_^^_^_  without  monopoly  ap- 

proximating the  natu- 
ral rate. 

8.    I-cvel  "f  pay  with  no  unions 

In      3  acid. 

Wages  of  non-union  labor 
——^^^^—^—^1^^^—  excluded  from  the  more 

productive  fields. 

S.  ^»~i^^^i^i^-^_^^^^^^_^^^,.^__^    Base  from  which  wages  are 

measured. 

The  height  of  lines  1,  2,  3,  and  4,  above  the  base 
line  5,  measures  wages,  and  the  length  of  the  lines 
rudely  indicates  the  numbers  of  workmen  in  differ- 
ent classes.  The  dotted  lines  above  and  below  line  1 
represent  what  union  labor  which  maintains  by  force 
a  monopoly  of  its  field  may  be  able  to  get  from  em- 
ployers who  are  in  a  combination.  It  may  be  more 
than  competing  employers  would  give  or  it  may  be 
less. 

For  men  in  strong  unions  who  have  carte  hlanche 
to  defend  their  fields,  the  policy  of  leaving  other  labor 
to  its  fate  is  overwhelmingly  the  more  profitable. 
With  a  choice  between  gaining  a  hundred  per  cent  in 
wages  for  ourselves  or  ten  per  cent  for  working  hu- 
manity, self-interest  speaks  decisively  in  favor  of  the 
former  alternative. 

In  !  ction  with  the  actual  dealings  of  workmen 
with  tuLu-  employers  the  following  are  the  principal 
facts :  — 

1.  When  labor  makes  its  bargain  vith  employers 
without  organization  on  its  o?/n  side,  the  parties 
m  the  transaction  are  not  on  equal  terms  and  wages 
are  unduly  depressed.    The  individual  laborer  offers 


ORGANIZATION    OF   LABOR 


467 


what  he  is  forced  to  sell,  and  the  employer  is  not 
forced  to  buy.  Delay  may  mean  privation  for  the 
one  party  and  no  great  inconvenience  or  loss  for  the 
other.  If  there  are  within  reach  a  body  of  neces- 
sitous men  out  of  eini)loyment  and  available  for  filling 
the  positions  for  which  individual  laborei-s  are  apply- 
ing, the  applicants  are  at  a  fatal  disadvantage. 

2.  Collective  bargaining  is  a  partial  remedy  for  this 
disability  and  brings  the  pay  of  labor  closer  to  its 
normal  standard  than,  under  individual  bargaining,  it 
could  possibly  be,  but  does  not,  of  itself,  enable  one 
class  of  laborers  to  raise  themselves  to  a  position  which 
is  very  much  above  that  of  a  majority  of  the  others. 
It  gives  to  no  class  of  workers  any  monopoly  of  their 
field  or  any  power  to  tax  the  public  or  oppress  men 
who  are  unorganized.  It  is  a  normal  and  demo- 
cratic measure. 

3.  Many  actual  trade  unions  do  not  depend  upon 
mere  collective  bargaining,  but  aim  to  secure  a  special 
gain  through  a  partial  monopoly  of  their  several 
fields  of  labor.  Their  policy  is  exclusive  in  that  it 
tries  to  limit  the  number  of  men  who  are  admitted 
to  the  unions  and  to  prevent  non-union  men  from 
working  at  the  craft. 

4.  In  the  establishing  of  such  control  of  fields  of 
labor  some  force  is  employed  in  order  to  bar  from  the 
fields  men  who  would  gladly  enter  them.  "  Slugging  " 
is  a  frequent  part  of  the  strategy  used  when  strikes  are 
pending,  and  this  elastic  term  covers  a  wide  range 
of  deterrent  arguments.  Whatever  goes  beyond  a 
verbal  rlemand  or  insult  to  the  man  or  his  family  and 
involves  any  use  of  physical  force  is  inclufled  in  the 
meaning  of  the  term,  and  the  action  ranges  from 
small  injuries  to  the  clubbings  which  maim  and  kill. 


468 


ESSENTIALS   OF   ECONOMIC   THEORY 


I 


Moreover,  social  ostracism  is  to  be  rated  as  tanta- 
mount to  force  as  a  means  of  preventing  a  free  move- 
ment of  labor. 

5.  When  the  resort  to  force  is  defended,  it  is  on  the 
ground  that  the  organized  laborers  have  a  right  of 
tenure  of  tlieir  positions  and  that  they  may  vacate 
them  and  still  hold  them  as  quasi-property.  One 
man  should  not  "take  another  man's  job  "  even  after 
the  other  man  has  left  it.  Acting  on  this  claim,  union 
laborers  treat  men  who  attempt  to  occupy  the  va- 
cated places  much  as  a  man  would  treat  intruders 
on  his  land  or  in  his  house.  It  is,  as  is  claimed,  a  case 
in  which  a  man  must  be  his  own  policeman  and  protect 
his  property. 

6.  The  public  sympathizes  with  the  worker's  dread 
of  the  comp3tition  which  he  encounters  when  unem- 
ployed men  are  gathered  from  near  and  far  and  set 
working  in  strikers'  positions.  It  even  tolerates,  in 
a  way,  his  claim  of  quasi-ownership  of  his  position,  and 
though  it  condemns  the  violence  with  which  he  en- 
forces the  claim,  it  does  not  summarily  repress  the 
violence.  It  is  without  &  well-defined  policy  and 
often  weakly  permits  disorders  to  grow  into  anarchy 
which  only  troops  can  quell.  Local  governments  are 
often  reluctant  to  lay  vigorous  hands  on  "sluggers," 
even  when  to  do  so  would  forestall  the  necessity  for 
severe'-  measures.  This  is  due  to  an  instinctive 
feeling  that  hardship  and  injustice  may  result  from 
allowing  employers  to  utilize  a  reserve  of  idle  labor 
as  a  means  of  depressing  their  employees'  wages  and 
defeating  strikes. 

7.  It  is  realized,  on  the  other  hand,  that  giving  to 
violence  a  free  rein  means  an  amount  of  anarchy 
which  no  state  can  tolerate,  that  non-union  laborers 


ORGANIZATION    OF    LABOR 


469 


have,  under  the  law,  a  claim  to  protection,  and  that 
allowing  strikers  to  drive  them  from  the  field  is  per- 
mitting a  monopoly  to  be  established  by  crime. 

8.  The  reluctance  promptly  to  repress  violence,  on 
the  one  hand,  or  to  leave  it  unopposed,  on  the  other, 
expresses  a  mental  wavering,  since  the  state  perceives 
and  follows  no  clear  principle  in  this  connection.  It 
has  neither  defined  the  nature  and  extent  of  laborers' 
rights  nor  provided  for  any  orderly  process  for  secur- 
ing them. 

9.  The  only  escape  from  this  situation  is  by  ar- 
bitration. It  is  necessary  to  adjudicate  the  laborer's 
demand  for  wages  and  to  legalize  his  tenure  of  place 
on  condition  that  he  shall  accept  a  just  rate  of  pay. 
The  state  is  bound  to  ascertain  and  declare  what  rate 
is  just,  to  confirm  the  workers  in  their  positions  when 
they  accept  it,  and  to  cause  them  to  forfeit  their 
right  of  tenure  if  they  refuse  it.  If  the  workers  thus 
forfeit  their  claim,  their  positions  are  clearly  open  to 
whoever  will  take  th(MTi,  and  the  state  is  bound  to 
protect  the  men  who  do  this.  Such  appears  to  be 
the  present  situation,  and  an  essential  feature  of  it  is 
the  need  of  ascertaining  on  what  principle  a  court  of 
arbitration  should  proceed  in  determining  what  rate 
of  pay  is  just. 


m 

f  ; 


CHAPTER  XXVI 


THE   BASIS   OF  WAGES  AS   FIXED   BY   ARBITRATION 


f 


The  state  needs  an  authoritative  mode  of  determin- 
ing what  rate  of  pay  is  "reasonable."  This  duty  is 
often  imposed  on  boards  of  arbitration,  forwhose  guid- 
ance no  definite  principle  of  justice  has  as  yet  been 
prescribed.  Such  a  board  has  to  depend  on  its  own 
intuitions.  It  approaches  its  difficult  work,  having  no 
legal  rule  for  reachinf'  a  decision,  and  yet  compelletl, 
if  possible,  to  reach  one  which  will  actually  settle  the 
dispute  referred  to  it  and  enable  production  to  go  on. 
It  must  try,  in  the  verdict  it  pronounces,  to  satisfy 
its  own  sense  of  equity.  What  such  a  tribunal  has, 
in  most  cases,  actually  done  has  been  to  make  com- 
promises, and  this  has  measurably  accomplished  both 
of  these  ends.  A  verdict  that  "splits  the  difference'' 
between  the  men's  demand  and  their  employers' 
is  most  likely  to  cause  work  to  be  resumed;  and  on 
the  ground  that  each  party  is  probably  claiming  too 
much,  and  that  justice  lies  between  the  claims,  it  in- 
sures a  rude  approach  to  fairness.  This  action  has 
caused  unfavorable  criticism  of  the  whole  system  of 
arbitration,  on  the  grounrl  that  it  abandons  the  effort 
to  reach  absolute  justice  and  tries  chiefly  to  end  the 
quarrel  on  any  terms,  and  also  that  by  giving  strikers 
a  part  of  what  they  demand,  it  encourages  them  to 
strike  again  and  secure  more.  We  have  to  sec 
whether  a  court  can  do  better  than  this  and  whether 

470 


WAGES    A8    FIXED    BY    AUBITRATION 


471 


such  a  orude  procedure  has   tended  at  all  toward 
putting  wages  on  a  normal  basis. 

Why  a  Court  cannot  reduce  Wages  in  Favored  Fields 
to  the  Rate  prevailing  at  the  Margin  of  Employment.  — 
A  tribunal  of  arbitration,  which  has  to  ileal  with  con- 
soliilatcd  capital  and  organized  labor,  acts  in  a  field 
where  both  profits  and  wages  are  higher  than  they  are 
in  most  departments  of  industry,  f^hould  a  court 
then  take  as  its  standard  of  just  wages  what  unor- 
ganized labor  gets  when  it  works  for  independent  em- 
ployers? That  would  usually  level  the  pay  of  the 
class  of  laborers  it  is  dealing  with  to  the  standard  set 
by  a  much  more  poorly  paid  class. 

Should  the  court,  on  the  other  hand,  take  as  the 
just  rate  the  one  that  generally  prevails  where  em- 
ployers are  organized  in  trusts  and  workmen  in  exclu- 
sive unions?  That  would  be  legalizing  the  result  of 
monopoly.  The  court,  in  such  a  case,  knows  that  the 
profits  of  the  business  are  increased  by  the  employers' 
monopoly  and  wages  by  the  workmen's;  and  yet  it 
will  not  pull  down  the  rate  of  pay  to  the  level  i)revail- 
ing  where  no  combinations  exist.  On  the  other 
hand,  to  legalize  any  high  rate  of  wages,  whic-h  is  made 
possible  only  by  a  double  monopoly,  would  seem  to 
be  equally  unjust. 

The  Power  oj  Monopolistic  Trade  Ibiions  under 
Different  Conditions.  —  Arbitrators  have  to  deal  with 
trade  unions  which  appeal  to  some  kind  of  force 
in  defending  their  right  of  possession  of  a  field  of 
labor.  They  make  their  own  demands,  strike,  and 
compel  rivals  to  stay  out  of  the  positions  they  vacate. 
When  this  policy  is  tolerated,  they  secure  an  excep- 
tionally high  rate  of  pay. 
We  may  represent  the  product  of  labor  and  its  pay 


i 


472 


ESSENTIALS  OF  ECONOMIC  THEORY 


in  the  different  occupations  by  the  accompanying 
diagram. 

The  heavy  line  AA'  represents,  by  its  height  at 
diflferent  points  above  the  base  line  EE',  the  product 
that  is  specifically  imputable  to  labor  in  different  em- 


ployments.   The  part  of  the  figure  whore  the  line  is 
far  above  EE'  represents  the  condition  where,  on  the 
employers'  side,  monopolies  are  established;    while 
on  the  right  of  the  figure,  where  the  line  has  descended 
and  is  slowly  approaching  the  base,  the  condition  is 
represented  in  which  employers  are  competing  with 
each  other,  and  many  of  them  are  selling  their  prod- 
ucts at  prices  that  only  cover  the  cost  of  creating 
them.    A  unit  of  labor  working  for  a  monopoly  cre- 
ates as  large  a  physical  product  as  it  does  elsewhere. 
It  turns  out  as  many  tons  of  steel  or  cases  of  cloth, 
etc.,  as  though  no  monopoly  existed,  and  the  price  of 
the  goods  is  high  because  less  labor  is  employed  than 
would  be  employed  under  competition  and  fewer  goods 
are  produced      The  actual  profluct  of  the  unit  of 
labor,  as  measured  in  dollars,  is  enhanced  by  the  em- 
ployers' monopoly.     BB'  represents,  by  its  varying 
distance  above  EE',  what  organized  labor  can  get 
under  the  different  conditions.     On  the  left  it  forces 
the  trusts  to  share  gains  with  it,  and  gets  a  high  rate 
of  pay;  while  on  the  right,  where  employers  are  not 


WAGER   AS    FIXED    BV    ARBITRATION 


473 


in  combination  and  there  are  no  such  great  gains  to 
draw  on,  it  gets  less,  although  at  the  extreme  right  it 
gets  all  that  it  produces.  Diy  represents  what  unor- 
ganized labor  can  get  under  the  different  conditions, 
and  it  is  usually  somewhat  more  where  trusts  employ 
it  than  it  is  elsewhere.  The  dotted  line  CC  represents 
the  product  of  labor  as  it  would  be  if  it  were  equalized 
in  the  different  fields. 

Th£  Parlies  interested  in  a  Dispute  in  ivhirh  Both 
Labor  and  Capital  are  Organized.  —  We  can  best  deal 
with  the  problem  of  the  adjustment  of  wages  by  arbi- 
tration if  we  approach  it  in  a  region  where  organization 
is  strong,  both  on  the  side  of  labor  and  on  that  of 
capital,  and  disturbances  of  the  natural  system  are 
greatest.  The  struggle  that  here  goes  on  is,  in  a  way, 
triangular.  Organized  labor  contends  against  its 
own  employers,  on  the  one  hand,  and  against 
ganized  labor,  on  the  other;  and  the  part  which  - 
velops  the  greatest  bitterness  of  feeling  and  the  most 
violence  is  the  strife  between  labor  and  labor  —  be- 
tween the  trade  unionists  who  strike  and  the  men 
who  attempt  to  occupy  their  positions.  The  union 
is  more  tolerant  of  the  employer's  action  in  driving 
a  hard  bargain  than  it  is  of  the  "scab's"  action  in 
"taking  another  man's  job." 

The  Public  a  Fourth  Party  in  the  Case.  —  The  three 
parties  just  named  —  employers,  organized  employees, 
and  applicants  for  places  —  are  not  the  only  parties 
whom  the  dispute  affects.  The  public  has  a  vitnl 
relation  to  it,  and  in  a  true  sense  its  interest  and  rights 
are  supreme.  The  public  has  a  right  to  demand  that 
production  should  not  i)e  interrupted,  anci  that  the 
supply  of  necessary  articles  should  not  be  cut  off; 
and  it  is  in  line  with  this  demand  that  arbitrators 


i 


474 


ESSENTIALS  OF   ECONOMIC  THEORY 


geek  first  for  an  award  that  the  contending  parties 
will  be  willing  to  accept. 

Two  Issues  needing  Settlement.  —  In  the  immediate 
contest  over  the  adjustment  of  pay,  the  three  parties 
first  named  are  the  ones  primarily  involved.  In 
discharging  its  iluty  as  the  preserver  of  justice,  the 
court  finds  two  issues  which  need  to'be  settled  rightly. 
The  dispute  l)etween  entrepreneurs  and  workmen 
must  Ik?  rightly  adjusted,  and  the  issue  between  the 
workmen  and  other  labor  must  be  so.  The  power 
of  the  state  cannot  properly  be  used  (1)  to  force  from 
employers  mf>re  than  they  can  ivfford  to  give,  or 
(2)  to  exclude  from  any  field  of  employment  free 
laborers  who  are  able  and  willing  to  do  the  recjuired 
work.  Arbitrators  make  their  awards  with  an  eye 
to  conditions  within  the  business  and  to  the  state  of 
the  labor  market.  Instinctively  an  arbitrator,  in 
trying  to  satisfy  his  sense  of  justice,  thinks  first  of 
the  amount  that  the  business  yields.  The  men  must 
not  take  the  whole  income  from  the  business,  leaving 
to  the  entrepreneur  nothing  wherewith  to  meet  the 
claim  for  interest.  Without  doing  this,  however, 
they  may  ask  for  much  more  than  other  laborers  will 
accept,  and  the  question  arises  whether  this  should 
be  conceded  to  them.  In  merely  putting  the  relation 
of  workmen  to  employers  on  a  proper  footing,  the 
tribunal  may  leave  the  relation  of  the  strikers  to  other 
workmen  as  unsatisfactory  as  it  has  been.  It  appears 
that  the  tribunal  of  arbitration  cannot  by  one  act 
settle  the  two  issues  that  re  presented  to  it.  If  it 
gives  to  the  men  what  seems  like  a  fair  share  of  the 
product  of  the  buoiticss  which  employs  them,  it  gives 
more  than  most  workers  get  and  more  than  the  law 
of  final   productivity   of  labor  would  afford.    Yet 


WAOES    AS    FIXED    BV    ARBITRATION 


475 


without  a  ruthloss  cutting  down  of  t.  p  pay  of  favored 
laborers  it  cannot  apply  the  standard  of  final  social 
productivity  of  lalK)r.  If  it  a[)[)!ios  this  standard 
and  cuts  flown  the  men's  actual  pay,  they  will  refuse 
to  abide  by  the  decision;  an<l  if  it  tries  to  obtain  a 
power  of  compulsion  and  make  the  men  accept  its 
decisions,  they  will  try — prol)!ihly  successfully  — 
to  defeat  the  attempt.  A  system  of  compulsory 
arbitration  that  should  go  to  the  length  of  forcibly 
equalizing  the  wages  paid  to  men  of  like  ability  in 
different  occupations,  wouM  not  be  tolerated  in  a 
democratic  community. 

The  Difficulty  of  Applying  the  Te-^t  of  Final  Produc- 
tivity.—  The  law  of  final  productivity  works  most 
efficiently  wh(i.  works  automatically,  as  it  does 
when  competing  .-mployers  make  the  best  bargains 
they  can  with  locally  organized  lal)orers.  The  results, 
then,  approach  the  theoretical  standard,  though  they 
do  not  entirely  coincide  with  it.  The  law,  however, 
cannot  be  rigorously  apj)lied  by  a  tribunal  which  is 
fixing  a  rate  of  pay  by  its  own  conscious  act.  How 
can  the  judges  directly  ascertain  how  much  a  final 
increment  of  social  lalwr  produces? 

Employers,  indeed,  do  make  such  tests.  An  esti- 
mate of  how  much  a  few  additional  laborers  would 
add  to  the  product  of  a  business  often  ha.s,  in  .some 
way,  to  be  made,  and  employers  manage  to  make  it ; 
but  subsequer*  experience  is  nece.«sary  for  verifying 
their  judgment.  V  rule  of  pay,  governed  by  marginal 
productivity,  results  from  the  action  spontaneously 
taken  by  a  myriad  of  employers,  who  enlarge  their 
working  forces  when  they  find  that  they  gain  thereby, 
and  reduce  them  when  they  lose.  Of  course  no 
court  could  do  amthing  of  this  kind.     No  depart- 


li 


Ai. 


^■1 


476 


ESSENTIALS   OF   ECONOMIC   THEORY 


ment  of  industry  will  turn  itself  into  a  laboratory  for 
testing  the  productive  power  of  labor.  It  is  clear 
that  the  procedure  must  be  much  simpler  and  cruder ; 
and  a  vital  question  is  whether  a  board  of  arbitration, 
proceeding  as  it  must  do,  is  under  any  influence  that 
impels  it  to  render  decisions  which,  in  any  degree, 
conform  to  the  theoretical  standard  of  pay.  Does  the 
economic  law  of  wages  operate  at  all  when  civil  law 
steps  in  to  the  extent  of  creating  any  tribunal  of  ar- 
bitration ?    We  shall  see. 

The  Necessity  for  Some  Standard  on  which  Arbitra- 
tors may  base  Aivnrds,  —  When  a  board  of  arbitration 
tries  to  do  anything  more  than  to  end  a  quarrel,  it 
must  seek  for  some  principle  of  justice.  If  it  is  dealing 
with  a  favored  class  of  laborers,  it  finds  two  extreme 
limits  between  which  its  awards  must  fall,  namely 
(1)  the  product  which  the  business  yields  in  excess  of 
simple  interest  on  the  capital,  and  (2)  the  wages  that 
unorganized  laborers  may  offer  to  accept.  It  is  pos- 
sible that  the  workmen  may  demand  the  former 
amount  and  the  employers  may  offer  the  latter ;  and 
if  so,  compromising  is  a  rule-of-thumb  mode  of  doing 
justice.  In  the  case  of  a  strong  union  and  a  highly 
profitable  business  the  employers  may  offer  more 
than  the  minimum  amount,  and  the  award  that  is  a 
compromise  between  the  terms  of  the  contending 
parties  will  then  be  well  above  that  which  is  a  fair 
mean  between  the  possible  extremes ;  yet  it  does  not 
appear  that  it  really  conforms  to  any  ethical  prin- 
ciple. 

Average  Waqes  as  a  Standard.  —  Another  possible 
basis  of  an  award  is  the  average  rate  of  wages  prevail- 
ing; but  it  has  no  claim  a«  a  standard  of  t-xact  jus- 
tice and  is  very  far  from  being  work'ble.    Wages  vary 


WAGES   AS    FIXED    BY    ARBITRATION  477 

from  a  very  high  rate  to  a  very  low  one;  and  the  high- 
est rate  is  that  which  prevails  where  a  trade  union 
which  is  strong  enough  to  keep  men  out  of  its  field  of 
employment  deals  with  a  trust  which  is  strong  enough 
to  keep  rival  producers  out  of  its  field  of  business 
Under  such  conditions  shall  a  court  average  this  rate 
and  a  very  low  one,  and  reason  that  a  mean  thus 
arrived  at  is  a  legitimate  standard  of  pay  or  one  that 
would  be  realized  if  no  monopolies  existed?    There 
is  no  evidence  that  this  is  the  accurate  fact,  and  there 
is  every  evidence  that  a  verdict  attained  in  this  way 
would  be  rejected.     It  would  cut  down  the  pay  that 
the  favored  workers  have  been  getting,  not  to  men- 
tion denying  them  the  increase  they  are  striking  for. 
On  the  other  hand,  the  lowest  rates  prevail  where  no 
permanent  organizations  exist;  and  if  a  strike  should 
arise  here,  should  the  tribunal  take  an  average  rate  of 
pay  as  its  standard?    That  would  greatly  increase 
the  rate  that  prevails  in  the  region  where  it  is  acting, 
and  would  give  the  men  more  than  most  of  their 
employers  could  afford.     It  would  discard  the  neces- 
sary rule  of  keeping  within  the  limit  of  what  an  indus- 
try can  pay  without  seeing  many  of  its  shops  and  mills 
closed.     Yet  a  court  which  refused  to  raise  the  pay  of 
the  lowest  class  at  all  would  seem  to  accept  the  bad 
results  of  monopoly;    for  it  would  ratify  the  hard 
arrangements  which  workers  who  are  excluded  from 
the  better  fields  are  forced  to  accept. 

A  Court  of  Arbitration  not  the  Atjency  for  Rectifying 
General  Evils  due  to  Monopoly.  ~h  will  be  seen  that 
the  difficulty  we  discover  in  the  way  (.f  a  wholly  satis- 
factory action  by  the  court  is  causeil  by  a  tacit  de- 
mand that  it  shall  undo  th(>  resuRs  of  monopoly  itself. 
We  instinctively  say  to  ourselves  that  the  court  nmst 


478  ESSENTIALS   OF  ECONOMIC  THEORY 

insist  on  doing  ultimate  justice,  and  that  all  rates 
perverted  by  monopoly  are  unjust.    The  arbitrators 
should  pull  down  the  high  rates,  raise  the  low  ones, 
and  create  such  an  approach  to  uniformity  as  would  be 
realized  if  labor  were  as  perfectly  mobile  as  a  static 
assumption  requires.    To  do  this  would  give  some 
laborers  much  less  than  their  employers  can  afford  to 
pay  and  less  than  they  often  do  pay ;  while  it  would  be 
giving  to  others  more  than  their  employers  can  pay 
witkout  bankrupting  themselves.     If  such  levelling 
is  to  be  done,  it  must  be  done  by  some  other  agency 
than  a  board  ;i  arbitration. 

The  Attitude  of  the  Public  toward  a  Strike  by  Em- 
j^Ioyees  0}  a  Monopoly.    -  If  we  turn  from  a  formal 
tribunal  to  the  court  of  public  opinion,  we  find  a  like 
state  of  affairs.    There  is  no  danger  whatever  that 
the  public  will  justify  cutting  down  the  wages  now  re- 
ceived by  men  in  the  employment  of  a  monopoly  to 
a  much  lower  level.    That  in  itself  would  not  right 
the  wrongs  of  the  poorly  paid  workers  or  those  of  tlie 
public  itself.    The  employer  would  go  on  getting  high 
prices  for  his  products  and  would  pocket  the  now 
gain  which  the  reduction  of  wages  gave  him.    If  a 
great  corporation  is  now  taxing  the  public,  even  those 
who  suffer  would  rather  see  the  proceeds  of  the  grab 
shared  with  the  men  than  see  it   all  held  by  the 
.^mploying  corporation.     It  is,  indeed,  true  that  if  a 
tribunal  were  to  give  the  men  an  increased  share  ct 
what  the  monopoly  is  getting,  the  employing  company 
would  trv  to  recoup  itself  from  the  public  by  rr.:sing 
prices  still  higher;   and,  if  it  were  to  give  a  reduce. 
share,  the  company  might  enlarge  its  business  oii'l 
make  its  prices  a  shade  lower.     Giving  to  the  mrn  :•: 
share  of  the  grab  made  by  their  employer  do>^s  in- 


WAGES    AS    FIXED    BY   ARBITUATION  479 

directly  cause  a  crrtain  increase  of  the  injury  done  to 
others,  and  withdrawing  a  share  might  slightly  lessen 
the  injury.  The  public  would  rather  sec  the  higher 
wages  paid,  and  take  some  chance  of  this  minor  and 
indirect  injury,  than  see  the  employing  company 
pocket  all  that  it  exacts  from  the  public. 

Monopoly  Prices  as  affected  by  an  Increase  of  Wages. 
—  Arbitration  often  authorizes  a  rate  of  pay  based  on 
the  profits  of  an  employers'  monopoly;  and  yet  a  tri- 
bunal of  this  kind  must  not,  and  will  not,  make  itself 
the  accomplice  of  any  monopoly  by  making  its  posi- 
tion more  secure.    The  policy  of  every  public  insti- 
tution must,  and  will,  be  designed  to  help  make  an 
end  of  every  such  outlaw  that  now  has  a  foothold  in 
the  field  of  business.     Yet  any  plan  which  would  force 
a  monopolistic  employer  to  give  to  his  men  an  increased 
share  of  the  " grab "  which  he  makes  from  the        kets 
of  consumers  tends  to  increase  the  amount  of  the  grab 
if  the  employer  is  entirely  secure  in  his  position.     A 
monopoly  that  is  thus  safe  from  interf(>rence  tries  to 
put  the  price  of  each  of  its  products  at  the  point  where 
the   largest   net   revenue    is   afforded.    If   distance 
along  the  line  AG  measures  Mae  supply  of  a  commodity 
and  vertical  distance  from  it    n^asures  price,  DF 
will  be  the  price  curve  of  a  commo.lity,  as  it  is  offered 
in  increasing  amounts.     AD  will  be  the  price  when  one 
unit  is  offered,  and  GF  will  be  the  price  when  the  full 
amount  represented   by  the   line  AG  is   produced. 
The  price  will  then  stand  at  the  cost  of  producing  the 
article.     When  a  monopoly  is  firmly  established,  it 
will  seek  to  get  the  largest  net  profit  that  can  be  hatl, 
and  a  consistent  execution  of  the  plan  would  reduce 
the  output  from  the  amount  measured  by  .46'  to  that 
measured  by  AH.      The  price  would  then  become 


480 


ESSENTIALS    OF    ECONOMIC   THEORY 


HE  and  the  net  profit  the  amount  of  the  area  EB. 
If  wages  are  so  raised  that  the  cost  becomes  G'F', 
the  net  profit  becomes  EB'.  This  profit  can  be  in- 
creased by  further  reducing  the  product  to  the  amount 
AH',  putting  the  price  at  H'E',  and  the  net  profit 
E'B',  which  is  larger  than  EB'.  If  an  independent 
producer  can  employ  non-union  labor  and  create  the 

goods  at  the  cost  GF, 
and  market  them  with- 
out reducing  the  price 
much  below  the  level 
indicated  by  H'E',  he 
can  make  on  each  unit 
of  product  a  {_  'it 
nearly  equal  to  I'E'. 
This  fact  makes  the 
monopoly  cautious 
about  raising  its  price  to  the  level  H'E'.  A  tribunal 
of  arbitration  may  somewhat  raise  wages  without 
fearing  such  an  increase  of  pricf  3.  By  a  crude  anil 
instinctive  judgment  the  court  will  hit  upon  some 
level  of  wages  which  falls  well  within  the  limit  of  what 
the  monopoly  can  pay  and  is  above  the  amount  which 
marginal  social  labor  gets. 

The  Probable  Result  of  a  Strike  as  a  Standard  for  an 
Award.  —  Let  us  see  what  would  happen  if  a  board  of 
arbitration  should  abandon  all  efTort  to  level  out  the 
general  inequalities  in  wages,  and  try  chiefly  to  enil 
quarrels  and  avert  long-continued  strikes.  With  this 
in  view  it  might  aim  to  give  the  men  whatever  they 
woukl  be  likely  to  gain  by  means  of  the  stri\e.  In  a 
true  sense  this  mode  of  procedure  is  more  nearly 
scientific  than  either  of  the  others.  Any  tribunal 
of  voluntary  arbitration  vail  aim  to  content  both  par- 


WAGES  AS  FIXED   BY   ARBITRATION 


481 


ties  sufficiently  to  prevent  an  interruption  of  busi- 
ness. The  men  may  consent  to  take  somewhat  less 
than  they  hope  to  got  by  a  successful  strike ;  and  the 
employers  may  be  willing  to  pay  somewhat  more  than 
they  would  at  the  end  of  a  successful  lockout.  The 
probable  outcome  of  the  struggle  may  be  differently 
estimated  by  the  contending  parties,  and  if  so,  an  act- 
ual struggle  will  end  by  making  employers  pay  more 
and  the  workmen  take  less  than  they  had  severally 
expected  to  do.  If  this  amount  can  be  awarded  at 
the  outset  and  the  struggle  precluded,  all  parties 
will  be  gainers  by  the  continuance  of  business,  unless 
the  employers  desire  a  strike  for  the  sake  of  making 
their  products  scarce  and  dear. 

When  the  Probable  Results  of  a  Strike  afford  an  Un- 
fair Standard  of  Wages.  —  Where  monopolies  exist  and 
trade  unions  rely  on  violence  in  carrying  their  point, 
it  would  not  be  fair  to  establish  a  permanent  rule  of 
wages  based  on  the  amounts  that  strikes  so  conducted 
secure.  Such  strikes  depend  for  success  on  the  vio- 
lent exclusion  of  non-union  men ;  and  actually  to  give 
permanence  to  rates  so  gained  would  be  to  fasten  on 
the  majority  of  workers  the  disabilities  under  which 
they  now  labor,  and  to  perpetuate  the  gains  of  a  two- 
fold monopoly.  On  the  other  hand,  if  the  court 
should  make  its  award  conform  to  the  probable  result 
of  a  strike  which  shoukl  be  general  in  the  trade,  but 
should  not  resort  to  any  violence,  the  procedure  would 
be  natural  and  would  base  itself,  in  an  unconscious 
way,  on  the  true  standartl  of  wages.  Such  a  general 
strike,  by  its  mere  magnitude,  would  preclude  the 
possibility  of  any  immediate  filling  of  the  vacated 
places  by  men  at  the  time  out  of  employment ;  and 
yet  the  fact  that  non-union  men  were  not  forcibly  kept 

2i 


i% 


li 


482 


ESSENTIALS   OF  ECONOMIC  THEORY 


out  of  the  trade  would  be  an  all-important  feature  of 
the  situation.  If,  when  no  strikes  were  pending, 
men  could  gain  admission  to  this  field,  there  would  be 
no  true  monopoly  on  the  men's  side.  The  rule  of 
giving,  by  arbitration,  what  a  strike  would  secure 
would  remove  the  chance  of  cutting  down  the  rate 
to  that  which  prevails  in  the  more  ill-paid  employ- 
ments, and  woidd  insure  to  the  men  the  rate  that  mar- 
ginal workers  in  actual  employment  get  plus  the  two 
additional  amounts  spoken  of  at  the  beginning  of  the 
preceding  chapter.  The  marginal  product  of  labor 
plus  an  amount  for  personal  superiority  plus  an 
amount  for  good  organization  would  be  the  standard 
to  which  wages  in  favored  employments  would  con- 
form; and  it  is  as  nearly  normal  as  any  practicable 
standard  would  be.  A  free  application  of  it  would 
reduce  the  wages  of  unions  that  thrive  by  the  use  of 
force  and  would  be  opposed  by  such  unions.  If  it 
were  adopted,  there  is  a  prospect  that  the  awards 
would  be  rejected  by  the  men  until  hard  experience 
should  teach  them  to  relinquish  gains  secured  by  vio- 
lence. Yet  a  tribunal  that  should  adopt  this  standard 
would  allow  workmen  to  retain  every  advantage  that 
organization  can  afford  without  a  violation  of  the 
criminal  law.  Its  guide  in  making  awards  would  be 
the  pay  which  the  best  unions  lawfully  get  in  trades 
akin  to  the  one  in  whose  case  they  were  acting. 

In  dealing  with  a  union  which  is  not  a  true  monopoly 
and  does  not  depend  on  force,  arbitrators  may  safely 
award  what  an  actual  strike  would  probably  secure, 
and  the  simple  plan  of  compromising  gives  an  approxi- 
mation to  this  amount.  What  the  men  will  acccjit 
and  the  employers  will  give  is  about  what  a  strike 
would  extort.     Where  a  monopoly  of  the  field  of 


WAGES    AS    FIXED    BY    ARBITRATION 


483 


labor  exists  and  force  is  used  to  protect  it,  a  compro- 
mise which  anticipates  the  probable  result  of  a  strike 
concedes  what  could  not  otherwise  be  lawfully  se- 
cured, and  W(>  have  to  see  whether  this  is  a  plan 
that  a  board  of  arbitration  can  properly  adopt. 

Arbitration  a.s  rijfccted  by  E^n ploycr.s'  Monopolies.  — 
We  confine  our  attention,  for  the  present,  to  arbitra- 
tion that  has  no  power  of  coercion  behind  it.     A  board 
may  be  formed  which  is  compelled  by  statute  to  in- 
vestigate quarrels  and  announce  fair  terms  of  settle- 
ment, but  the  contending  parties  may  be  allowed  to 
do  as  they  please  about  accepting  the  awards.    The 
most  difficult  case  with  which  such  a  tribunal  would 
have  to  deal  is  that  in  which  the  emjjloyer  has  a 
monopoly  of  a  department  of  production,  and  a  trade 
union  has  an  exclusive  possession  of  its  field  of  labor. 
The  mere  removal  of  the  employer's  monopoly  would 
so  greatly  simplify  the  situation  as  to  leave  no  ground 
for  serious  difficulty.     With  that  out  of  the  way,  — 
with  potential  competition  doing  the  perfect  work 
that  under  good  laws  and  good  policing  it  ought  to  do, 
—  the  pay  of  laborers  in  other  employments  would 
be  somewhat  higher,  and  extortionate  profits  would 
be  altogether  absent.     Profits  based  on  special  econ- 
omy would  exist,  as  they  should,  but  those  which  are 
filched  unjustly  from  any  one's  pocket  would  not  exi^i. 
There  would  be  likely  to  be,  in  most  of  the  subgroups, 
independent  employers  efficient  enough  to  hold  their 
positions,  but  without  any  means  of  getting  abnormal 
gains.    These  would  be  marginal  em.ployers  in  their 
several  subgroups,   and   their  returns   would   range 
about  that  static  level  at  which  the  wages  of  labor 
and  the  interest  on  capital  would  absorb  them  all. 
An  award  based  on  what  such  employers  could  pay 


■     7 


484 


E88KNTIALS   OF    ECONOMIC   THEORY 


would  express  what  other  employers  would  naturally 
pay,  and  it  would  l)call  that  the  subgroup  as  a  whole 
could  concede  without  ruining  some  of  its  members, 
but  it  would  allow  others  to  make  something  by  special 
economies  in  production.  Productivity  profits  they 
would  get  and  no  others,  and  these  it  is  in  every 
way  expedient  that  they  should  be  allo\;ed  to  enjoy. 
Suppressing  employers'  monopolies  would  retriovc 
much  of  the  difhculty  connected  with  arbitration,  and 
putting  an  end  to  violence  on  the  men's  part  would 
remove  almost  all  the  remainder. 

With  monopolies  in  the  fielil  it  is  quite  otherwise. 
Their  gains  are  not  of  the  kiml  that  it  is  for  the  interest 
of  the  public  to  let  them  keep.    The  public  claims 
these  sums  on  grounds  of  ecjuity  and  expediency. 
It  is  a  perverted  distribution  that  gives  them  to  their 
present  recipients;  and  this  fact  threatens  to  involve 
more  and  more  the  processes  of  production  themselves. 
Centralization,  without  monopoly,  increases  the  prod- 
uct of  industry;    but  the  monopolistic  feature  that 
often  attends  it   partially  paralyzes  the  producing 
forces,  and  must  be  gotten  rid  of  before  there  can  be 
a  normal  income  to  divide  and  a  normal  way  of  di- 
viding it.     The  court  of  arbitration  itself  cannot  get 
rid  of  it,  and  it  would  do  harm  if  it  should  try  to  do  so. 
Drastically  to  cut  down  wages  that  have  been  raised 
by  the  power  of  monopoly  would  injure  some  workmen 
without  materially  helping  others,  and  it  would  bene- 
fit chiefly  the  monopolistic  employers.    Such  a  policy 
would  bring  the  entire  system  of  arbitration  to  an 
end;  for  it  is  partly  a  fear  that  arbitration  wo  .Id  not 
leave  to  favorably  situated  unions  as  much  as  they 
can  now  get  by  strikes  and  boycotts  that  prevents 
the  system  from  coming  into  vogue.    The  state  can 


WAGES    AS    FIXED    BY    ARBITRATION 


485 


end  tho  monopoly,  but  it  must  do  it  by  other  meas- 
ures? tlian  installing,'  courts  of  arbitration.  In  the 
interim  —  long  or  short,  as  the  ca.'^e  may  be  - 
before  these  inoa.«ures  will  have  their  efTect,  it  is 
necessary  to  proceed  on  a  plan  of  securing  by  awards 
something  like  what  would  result  from  actual  trials 
of  strength.  The  effects  of  adjudication  will  not, 
in  this  interim,  be  ideal,  but  it  is  necessary  to  accept 
this  fact  and  struggle  the  harder  to  obtain  conditions 
that  will  improve  them. 

Abnormal  Conditiom  which  Arbitrator!^  must  Accept. 
—  Crude  force  of  one  sort  or  another  would  sometimes 
give  to  organized  labor  twice  or  thrice  as  much  as  free 
labor  can  earn  at  the  social  margin  of  production, 
and  the  public  approaches  the  problem  of  adjustment 
while  this  con<lition  exi.sts.  It  may  be  that  a  trust 
has  crushed  compotition,  made  large  gains  for  itself, 
and  made  it  possible  to  pay  employees  at  a  high  rate; 
while,  on  the  other  hantl,  a  trade  union  has  made  itself 
strong,  put  pressure  on  the  employers,  excluded  free 
laborers,  and  secured  i  share  of  the  monopolistic 
spoils.  Arbitrators,  then,  whenever  a  strike  is  pend- 
ing, may  divide  the  spoils  as  a  strike  would  do,  be- 
tween masters  and  men.  This  will  leave  a  few  workers 
in  possession  of  a  rich  field  anrl  many  hungry  ones 
outside  of  it ;  and  we  have  asserted  that  the  board 
should  confirm  the  workmen's  tenure  of  place  on  the 
sole  condition  that  they  accept  a  rai  of  pay  which  it 
shall  authorize.  In  this  case  the  arl)itrators  authorize 
a  high  rate,  while  needy  men  stand  ready  to  take  a 
lower  one.  They  confirm  wages  based  on  the  profits 
of  monopoly,  but  look  to  the  state  as  tho  power  which 
will  get  them  out  of  their  anomalous  position,  by 
making  an  end  of  monopoly. 


486 


ES8KNTIAL8   OF    ECONOMIC   THEORY 


Why  Sharing  a  "Grab"  already  made  is  not  an 
Aggravation  of  the  Evil.  —  While  plunder  is  to  be  had, 
it  is  at  least  by  one  point  fairer  that  workers  should 
have  a  share  of  it  than  that  employers  should  have  it 
all.  We  have  saiil  that  the  court  of  arbitration  finds 
two  issues  needing  settlement,  namely,  the  relation 
of  employers  and  employed  within  the  business,  and 
that  of  laborers  outside  of  this  department  of  industr>' 
to  those  within  it.  Only  one  of  these  issues  is  it  ca- 
pable of  settling,  and  It  is  by  a  true  instinct  ami  not 
merely  from  expediency  that  arbitrators  permit 
workmen  to  share  in  some  degree  the  gains  of  the 
monopoly  that  employs  them.  This  is  legitimate, 
however,  only  on  the  condition  that,  by  further 
measures,  the  gains  of  monopoly  be  reduced. 

How  Arbitration  xinll  be  facilitated  by  the  Suppres- 
sion of  Monopolie  ?.  —  In  studying  monopolies  we  dis- 
covered that  the  prices  of  their  goods  do  not  entirely 
part  company  with  their  natural  standards,  even  when 
governments  do  not  at  all  interfere  with  them.  Po- 
tential competition  keeps  these  prices  from  rising 
above  the  standard  of  cost  by  more  than  a  certain 
margin.  We  shall  see  that  if  governments  do  nothing 
in  the  way  of  controlling  the  contests  over  wages,  the 
rates  that  these  yield  will  not  be  wholly  unnatural. 
They  will  be  held  within  a  certain  distance  from  the 
standards.  If  too  high  wages  are  exacted,  the  barriers 
will  be  broken  down  and  competing  laborers  will 
come  into  the  favored  fields.  The  potential  compe- 
tition of  idle  men  hangs  as  a  menace  over  the  heads 
of  the  too  exacting  trade  unionists,  and  enforces  a 
measure  of  prudence  in  the  wages  demanded.  If  the 
unions  ask  too  much  and  strike  in  order  to  get  it,  the 
competition  which  is  now  latent  will  become  active, 


WAGEH    AS    FIXED    BY    ARBITRATION 


487 


Other  men  will  take  the  vacated  places,  and  the 
struggle  of  force  will  begin.  Slugging  may  ensue  and 
may  go  to  the  limit  of  a  weak  government's  tolera- 
tion. The  more  complete  is  the  exclusion  of  free 
labor,  the  higher  is  the  rate  which  organized  labor 
secures;  but  this  rate  always  falls  within  a  certain 
distance  of  the  normal  one,  as  that  is  fixed  by  the  final 
productivity  of  social  labor.  Even  the  pay  secured 
by  violent  strikes  is,  as  we  have  already  shown, 
governed  by  the  law  of  final  productivity,  though  it 
does  not  coincide  with  that  rate.  Actual  pay  anil 
standard  pay  are  like  a  vessel  and  a  tug  attached  to 
each  other  by  a  hawser,  which  allows  one  to  drift 
far  from  the  other  but  does  not  let  them  part  company. 
In  the  long  run  the  tug  takes  the  tow  with  it.  Even 
the  wages  which  a  trust  gives  to  a  fighting  union  — 
wages  paid  by  a  monopoly  to  a  monopoly  —  are  gov- 
erned by  the  law  of  final  productivity,  since  there  is 
a  limit  on  what  the  trust  can  extort  from  the  public, 
and  there  is  a  limit  on  what  the  union  can  extort  from 
the  trust.  Potential  competition,  by  limiting  both 
the  producing  corporation  and  the  trade  union,  vin- 
dicates the  natural  law  of  wages,  though  its  results 
are  made  inexact  by  monopoly. 

How  Potential  Competition  affects  Organized  Labor. 
—  We  have  seen  that  potential  competition  keeps 
within  limits  the  prices  of  goods  made  by  trusts.  If 
they  become  too  high,  new  mills  are  built.  In  a  like 
way  potential  competition  puts  a  check  on  the  wages 
a  strong  union  can  secure;  for  if  these  are  too  far 
above  the  level  of  non-union  men's  pay,  such  men  will 
find  their  way  into  the  business.  Open  shops  will  be 
established,  either  by  the  present  employers  or  by 
new  ones.    There  will  be  much  to  be  gained  by  an 


it 


u 


488 


KftSKNTIAL*   OF    KrONOMIC   TIIKOUV 


indcpcndont  shop  manned  by  non-union  labor,  and 
the  danger  of  this  makes  a  trade  union  more  con- 
aervaiive  than  it  would  otherwise  l)e.  The  chief 
potentiality  in  the  case  is  that  of  the  new  and  inde- 
pendent shop,  and  if  the  way  is  open  for  this  to  appear, 
the  range  of  difference  between  the  pay  of  favored 
laborers  and  that  of  others  is  greatly  reduced.  The 
trade  union  may  be  able  to  carry  it'  .»int  and  keep 
free  lalvir  from  its  field,  so  long  as  it  has  only  its  own 
employers  to  deal  with;  but  if  new  employers  will 
appear  whenever  there  is  an  inducement  to  do  so, 
the  case  is  quite  otherwise.  The  new  mills  rnake  the 
greater  gains  if  they  are  manned  by  non-union  men. 

With  the  field  open  for  all  producers,  the  danger 
of  free  shops  with  free  men  will  imi)end  always  over 
the  union  that  demands  too  much  for  its  members. 
This  is  now  true  en  where  consolidated  companies 
exist,  and  it  would  be  doubly  true  if  there  were 
no  such  companies.  The  rivalries  which  would  then 
appear  would  keep  wages,  as  w^ii  i.-  I'rices,  ntar  to 
their  natural  stamlards. 

In  the  absence  of  monopolies  on  the  part  of  em- 
ployers, and  of  "slugging"  on  the  part  of  workmen, 
arbitrators  may  accept  as  standards  what  the  actual 
dealings  of  employers  and  employed  yield.  In  most 
cases  they  will  ratify  no  wrong  by  doing  so.  The 
court  may  act  as  it  nov.-  does  and  announce  a  rate 
based  on  a  mere  compromise  or  on  the  probable  result 
of  a  strike.  If  the  men  accept  the  award,  let  them 
keep  their  places;  but  if  not, let  the  positions  be  open 
to  whoever  will  take  them,  and  let  the  state  repress 
ever}'  form  of  violence  that  would  interfere  with  their 
doing  so.  The  sentiment  of  even  a  local  community 
will  sustain  such  a  maintenance  of  order. 


WAfJKS    AS    FIXKD    BY    AFtlUTRATrON 


4S9 


The  Ca.se  of  Trndfis  not  affected  by  the  Potential  Com- 
petition of  Non-uviov  Men  uith  Neir  Employer!^. — 
Builfling  trarlos  aro  peculiarly  situated  in  that  thoir 
proflufts  have  to  l)o  mpflo  in  thf  locality  whoro  thoy 
will  stay,  and  no  competition  from  labor  living  at  a 
distance  is  to  bo  feared.  If  the  local  unions  can  pro- 
tect thoir  field  by  force,  they  can  establish  a  high  rate 
of  pay,  even  though  the  employers  have  no  unions. 
Arbitration  that  merely  gives  what  a  strike  will 
yield  will  hero  deviate  greatly  from  the  natural  stand- 
ard of  wages. 

Labor  in  mining  is  somewhat  similarly  situated, 
and  so  is  labor  in  transportation.  In  these,  and  in 
some  other  fields,  new  men  do  not  weaken  the  posi- 
tion of  strikers  unless  they  are  brought  to  the  places 
where  the  strikers  have  been  working;  and  that  ex- 
poses them  to  assault.  It  is  in  the  making  of  portable 
goods  for  a  general  market  that  the  new  and  inde- 
pendent shop  manned  by  non-union  laborers  is  an 
important  factor. 

It  is  easy  to  answer  tlie  questloi;  whether,  in  such 
fields,  the  board  of  arbitration  should  confirm  the 
workmen's  tenure  of  place  while  his  pay  is  sustained 
by  force.  All  slugging  is  inherently  criminal  and 
should  be  always  and  everywhere  repressed.  In  the 
cases  that  we  first  examined,  a  safe  course  would  be  to 
hold  it  in  repression,  announce  a  rate  of  pay  based  on 
what  a  strike'  would  then  yield,  and  trust  to  other 
measures  for  destroying  monopoly  on  the  capitalist's 
side.  The  chief  danger  of  violence  begins  when  the 
men  reject  the  award  and  others  take  their  places, 
and  at  this  point  the  fa^t  of  arbitration  will  mnke  the 
duty  of  the  state  easier  though  hardly  clearer. 

The  case  of  such  trades  as  building  and  mining 


W'l 


490 


ESSENTIALS  OF  ECONOMIC  THEORY 


differs  from  the  others  only  in  the  fact  that  there  is 
not  present  the  check  that  is  elsewhere  afforded  by  the 
danger  of  new  mills,  and  the  pay  secured  by  crude 
force  is  high.  To  announce  a  rate  based  on  the  result 
of  a  strike,  if  slugging  is  to  be  permitted  during  the 
strike,  is  to  accept,  for  the  moment,  what  violence  will 
secure;  and  nothing  will  remove  this  feature  of  the 
adjudication  but  a  manful  assertion  of  sovereignty 
by  the  state  and  a  complete  ending  of  the  tolerance 
now  accorded  to  anarchy.  By  no  means,  however, 
does  this  deprive  union  men  of  the  advantage  that 
organization  gives  them.  They  may  be  securca  in  the 
possession  of  every  advantage  which  collective  bar- 
gaining, without  violence,  can  secure.  Great  num- 
bers enlisted  in  a  union  will  give  to  it  a  prospect  of 
success  in  enforcing  any  reasonable  demand.  Volun- 
tary arbitration,  that  aims  to  preclude  a  strike,  will 
have  to  respect  this  fact  of  organization  and  give  the 
men  about  what  a  legitimate  strike  would  yield. 
As  a  rule,  this  will  result  in  compromises  of  opposing 
claims,  and  if  violence  is  not  in  sight  as  a  resource, 
the  compromises  will  fall  near  to  the  natural  standard 
of  wages. 

Why  Conciliation,  is  preferred  to  Arbitration.  —  Both 
among  organized  laborers  and  corporate  employers 
there  is  a  dread  of  state  action  for  the  positive  adjust- 
ment of  wages.  There  is  a  preference  for  conciliation 
over  any  kipd  of  arbitration,  and  there  is  a  preference 
for  voluntary  arbitration  over  that  which  has  any 
trace  of  authority  behind  it.  For  tribunals  which 
have  full  coercive  power,  most  employers  and  strongly 
organized  laborers  have  an  insurmountable  repug- 
nance. If  such  tribunals  were  introc'u  .  it  would  be 
against  their  strongest  opposition,  whir    is  eaying  that 


WAGES    AS    FIXED    BY    ARBITRATION 


491 


a  measure  designed  to  secure  industrial  peace  would 
have  to  be  put  nito  operation  vhile  the  parties  di- 
rectly interested  in  it  opposed  it  with  might  and 
main. 

The  reasons  tnr  lliis  attilac  e  are  not  difficult  to  dis- 
cover. Conci:  i!  '.r'  aims  solely  to  secure  internal 
peace  in  a  dep.'.t.'urit  of  jn('„stry.  To  avert  strikes 
or  reduce  their  duration  is  all  that  it  can  do  and  all 
that  the  parties  directly  interested  wish  to  have  it  do. 
From  the  point  of  view  of  employers  and  employed 
in  a  highly  profitable  industry,  the  averting  of  strikes 
is  enough  to  aim  at,  and  even  the  public  sometimes 
accepts  this  easy-going  view  and  thinks  that  every- 
thing desirable  is  gained  merely  by  averting  strife 
or  ending  it  when  it  occurs.  Uninterruptetl  produc- 
tiim  — the  saving  of  the  great  wastes  that  strikes 
entail  — does,  indeed,  promote  the  public  welfare. 
When  conciliation  does  this,  it  indirectly  does  some- 
thing for  the  public.  The  essential  thing  about  con- 
ciliation, then,  is  that  it  does  not  consciously  try  to 
do  anything  but  to  make  the  two  parties  in  the  dispute 
over  wages  contented  enough  to  go  on  producing. 
A  board  which  aims  ohly  to  do  this  is  careful  not  to 
introduce  any  one  who  represents  an  outside  interest. 
The  procedure  must  be  kept  "within  the  family." 
As  is  often  said,  "those  who  understand  the  busi- 
ness" must  settle  disputes  within  it.  What  is  really 
desirerl  is  that  only  those  who  are  interested  in  the 
business  should  havo  anything  to  say  about  it,  and 
there  is  a  dread  of  giving  representation,  either  to  the 
general  public  or  to  independent  labor.  Moreover, 
when  the  defects  of  conciliation  are  spoken  of,  what  is 
montiuiicd  is  the  uncertainty  as  lo  its  working,  the 
probability  that  in  many  cases  it  will  not  bring  the 


J 


i-Ji 


ESSENTIALS   OF   ECONOMIC   THEORY 

disputants  to  an  agroenirrrt  and  cause  production  to 
go  on.  There  is  no  dread  of  the  rates  of  pay  that  it 
yields.  There  is  practically  no  dread  on  any  one's 
part  of  what  hai)peJis  when  employers  and  em- 
ployed are  contented  because  they  jointly  thrive  k. 
the  expense  of  the  public.  Rather  than  have  produc- 
tion stopped,  the  public  is  often  willing  to  let  a  dispute 
be  settled  on  almost  any  terms,  though  the  result  may 
be  to  let  some  men  thrive  at  th(>  expense  of  consumers 
and  of  other  laborers.  There  is  a  monopolistic  gral) 
the  sharing  of  which  makes  both  parties  better  off 
than  are  men  of  their  class  elsewhere.  Singular  as  it 
may  seem,  even  this  attitude  of  the  public  is  justifiable. 
It  is  entirely  right  not  only  to  welcome  conciliation 
where  it  can  be  made  to  work,  but  to  try  it  as  often 
as  possible  before  resorting  to  arbitration. 

Rates  resulting  from  Conciliotion  not  Unlike  those 
resulting  from  Strikes.  —  The  results  of  collective  bar- 
gaining, with  c  iiciliation  in  cases  of  dispute,  conic 
within  a  certain  distance  of  those  which  would  be 
gained  by  a  perfectly  natural  adjustment  of  wages. 
All  that  we  have  said  about  the  relation  of  wages 
adjusted  by  strikes  to  their  natural  standards  applies 
here ;  potential  competition  generally  keeps  the  actual 
rate  within  a  certain  distance  of  the  natural  one, 
though  a  monopoly  may  make  the  distance  unduly 
great.  If  potential  competition  works  feebly  on  the 
employers'  side,  —  if  independent  producers  are  slow 
to  appear  even  when  the  price  of  a  product  is  very 
high,  —there  is  a  large  profit  in  the  industry  for  some 
one;  and  if  potential  competition  works  feebly  on  the 
siile  of  labor,  —  if  workmen  can  safely  strike  with  little 
fear  that  independent  laborers  will  dare  to  take  tluir 
places,  —  the  men  can  secure  a  fair-sized  share  of  this 


WAGES    AS    FIXED    BY    ARBITRATION 


493 


profit.  A  strong  trade  union  working  for  a  strong 
monoj  >ly  gets  wages  that  exceed  the  standard  rate 
by  the  largest  obtainable  margin ;  and  yet,  as  we  have 
said,  even  this  excess  has  limits,  and  adjusting  dis- 
putes by  conciliation  does  not  alter  those  limits. 
The  rates  agreed  upon  are  still  governed  by  the 
standard  rate  to  the  same  extent  as  under  the  regime 
of  strikes.  The  strike  and  the  lockout  become  po- 
tential, but  they  impend  as  possibilities  and  do  their 
work.  The  board  of  conciliation  knows  that  they 
will  occur  unless  their  jjrobable  results  are  a.^ticipated 
and  forestalled  by  the  decision.  The  board  cannot 
do  otherwise,  therefore,  than  to  restrict  the  actual 
strikes.  Wages  then  become  the  natural  rate  with  a 
plus  mark,  and  may  be  said  to  be  adjusted  in  a  way 
that  at  the  bottom  is  natural,  though  it  works  under 
vitiating  influences. 

Why  Voluntary  Arbitration  does  more  than  Con- 
ciliation. —  Voluntary  arbitration  is  an  advance  over 
mere  conciliation  in  point  of  eflVctiveness.  It  depai' 
somewhat  from  the  plan  of  confining  the  action  to 
the  family,  since  it  introduces  some  other  parties  as 
arbitrators  and  thus  invites  some  recognition  of  out- 
side interests.  Nevertheless  its  actual  working  in- 
volves little  change  in  principle,  and  its  results  do  not 
greatly  vary  from  those  attained  by  conciliation. 
When  we  speak  of  arbitration  as  voluntary,  what  we 
usually  mean  is  that  acceptance  of  the  award  is  in  no 
way  enforced.  Either  party  may  accept  it  or  refuse 
it,  but  it  may  be  that  both  parties  acting  together 
cannot  prevent  the  investigation;  and  the  economic 
law  of  wages  acts  best  when  this  is  the  case.  How 
such  voluntary  arbitration  ir-  provided  for,  —  whrtlier 
it  is  established  by  free  contract  bet\^xon  employers 


494 


ESSENTIALS   OP   ECONOMIC   THEORY 


and  employed,  or  by  statute,  —  is  act  ii  -?  connec- 
tion of  importance.  The  one  thing  that  is  important 
is  that  no  compulsion  is  applied  to  either  party  to  force 
him  to  accept  the  award. 

A  Moral  Compulsion  due  to  Voluntary  Arbitration.  — 
A  certain  moral  force  is,  indeed,  necessarily  behind 
fae  award  of  such  a  tribunal.  It  informs  the  public 
what  fair-minded  men  regard  as  a  reasonable  adjust- 
ment of  the  dispute,  and  forces  any  one  who  refuses 
to  accept  such  a  decision  to  go  on  record  as  claiming 
more  than  is  presumably  just.  This  tends  to  alienate 
public  sympathy,  and  to  forfeit  the  aid  which  sym- 
pathy insures.  Moreover,  where  voluntary  arbitra- 
tion io  established  by  a  contract  between  parties,  — 
where,  for  example,  masters  and  men  agree  that  dur- 
ing a  term  of  years  disputes  that  cannot  otherwise  be 
settled  shall  be  referred  to  a  tribunal  constituted  in 
some  prescribed  way, —  the  decision  of  the  tribunal 
is  made  by  the  contract  to  be  especially  binding. 

Why  Mere  Compromises  lead  to  Fair  Results.  —  A 
merely  compromising  policy,  such  as  the  one  which 
has  often  been  sharply  criticised,  involves  an  approxi- 
mation to  what  strikes  would  yield ;  and  this,  as  we 
have  seen,  gives  results  which,  in  a  rude  way,  are 
controlled  by  economic  law.  A  fact  of  the  greatest 
importance  is  that  the  awards  made  by  boards  of  ar- 
bitration with  merely  voluntary  power  are  not  com- 
promises between  mere  demands  of  the  two  parties ; 
they  are  between  genuine  ultimata.  When  the  court 
is  called  in,  the  employer  has  offered  a  rate  of  pay  and 
stands  ready  to  close  his  mill  if  it  is  not  accepted ; 
and  the  men  have  offered  to  take  a  certain  rate  and  are 
ready  to  strike  if  the  rate  is  not  given.  The  essential 
fact  in  the  case  is  that  neither  of  these  rates  usually 


WAGES   AS    FIXED    BY    ARBITRATION 


495 


varies  by  more  than  a  certain  amount  from  the  natural 
level  of  wages.  There  is  every  difference  between  a 
demand  put  forward  for  strategic  purposes  and  a  real 
ultimatum.  If  workmen  knew  tliat  a  court  would 
simj)ly  make  an  even  division  between  their  own  de- 
mand and  their  employer's  offer,  then  men  who  were 
getting  two  dollars  a  day  might  ask  '')r  four  in  the 
hope  that  the  arbitrators  might  give  them  three. 
Even  if  no  such  expectations  were  entertained,  it  is 
certain  that  both  parties  would  exaggerate  their 
claims ;  workers  would  demand  more  and  employers 
offer  less  than  they  expected  in  the  end  to  agree  upon. 
When,  however,  the  demands  are  not  made  in  this 
way  for  the  sake  of  impressing  the  tribunal,  but  are 
known  to  be  genuine  ultimata,  the  case  is  quite  dif- 
ferent. The  workers  will  actually  go  on  a  strike  if 
their  demands  are  not  conceded,  and  they  will  cer- 
tainly have  to  do  this  if  they  make  their  figures  ex- 
travagant. The  employer  will  close  his  mill  if  his 
offer  is  not  accepted,  and  he  will  have  to  do  it  if  his 
offer  is  absurdly  low.  Very  much  is  involved  in  the 
fact  that  an  actual  severing  of  the  relation  between 
employers  and  employed  impends  over  them  as  a 
possibility. 

The  Chief  Advantage  of  Arbitration  over  Conciliation. 
—  We  are  now  in  a  position  to  measure  the  real  differ- 
ence between  conciliation  and  voluntary  arbitration. 
If  a  strike  comes  after  nothing  has  been  tried  except 
conciliation,  there  is  often  nothing  to  prevent  the 
strikers  from  resorting  to  all  the  devices  which  are 
available  for  guarding  their  tenure  of  place  —  in  other 
words,  for  keeping  "  scabs  "  out  of  the  field.  The  local 
community  is  in  its  usual  position  of  uncertainty  as 
to  the  equities  of  the  case,  and  is  likely  to  show  its 


;l. 


iJ^^ii;;^^J!^imMMMi^tM. 


496 


ESSENTIALS   OF   ECONOMIC   THEORY 


usual  hesitancy  in  giving  to  the  new  lalx)rers  the  com- 
plete protection  which  the  laws  enjoin.  There  is  the 
customary  dread  of  the  effect  of  letting  a  strike-break- 
ing force  have  full  sway  and  the  opportunity  for  dis- 
ciplining the  former  workmen  into  submission.  The 
chance  that  the  resulting  rate  of  pay  may  be  too  low 
to  do  justice  to  the  laborers  remains  before  the  eyes 
of  the  local  community,  and  has  the  effect  to  which 
we  have  earlier  called  attention  —  that  of  taking 
much  of  the  vigor  out  of  the  official  arm  when  violence 
occurs. 

How  is  it  when  a  tribunal  of  arbitration  has  studied 
the  case  and  announced  a  decision?  Though  the 
workmen  may  bo  as  free  to  strike  as  ever,  such  an  ac- 
tion would  put  them  at  a  fatal  disadvantage.  The 
arbitration  has  given  to  the  public  a  basis  for  a  judg- 
ment as  to  the  equities  of  the  dispute.  If  the  tribunal 
is  one  which  commands  respect,  a  refusal  to  abide 
by  its  decision  puts  the  men  prima  facie  in  the  wrong. 
If  they  strike  now,  they  reject  a  rate  which  is  authori- 
tatively pronounced  just.  Even  this  they  have  the 
privilege  of  doing  if  they  so  desire;  but  if  they  go 
farther  and  forcibly  prevent  other  men  from  accepting 
the  equitable  rate  and  doing  the  work,  they  forfeit  their 
right  of  tenure;  and  it  would  be  a  strangely  consti- 
tuted public  which,  under  such  circumstances,  would 
let  them  use  fists,  missiles,  or  clubs  in  defending  it. 

There  may  be  an  agreement  between  employers  and 
employed  to  submit  to  impartial  arbitration  such  dis- 
putes as  are  not  otherwise  settle  i ;  and  when  this  has 
been  actually  done  and  a  decision  has  been  reached, 
it  is  made  by  the  contract  to  be  too  binding  to  be 
lightly  disregarded.  If  it  is  still  disregarded  and  if 
violence  is  resorted  to,  the  forfeiture  of  public  sym- 


---F;»-.'K' 


WAGES   AS   FIXED    BY   ARBITRATION 


497 


pathy  is  so  complete  that  there  is  little  danger  that 
violence  will  be  winked  at.  The  action  of  such  a  tri- 
bunal may  be  nearly  as  effective  as  that  of  one  which 
has  full  coercive  power. 

Why  Compulsory  Arbitration  is  less  Certain  to  give 
a  Just  Award.  —  Arbitration  by  a  court  that  has  full 
compu'  Ion  behind  it  does  not  theoretically  need  to 
satisfy  the  contending  parties.     If  it  can  fine  or  other- 
wise coerce  the  party  that  refuses  to  accept  its  man- 
date, and  thus  insure  a  forced  compliance  with  its 
orders,  it  is  conceivable  that  it  might  announce  rates 
of  pay  entirely  at  variance  with  prevailing  ones.     It 
might  announce  arbitrary  rates  or  make  a  bold  effort 
to  discover  and  introduce  those  which  should  coincide 
with  the  ultimate  natural  standards  —  which  would 
mean  a  relentless  reducing  of  some  rates  and  a  raising 
of  others.     In  a  democratic  country,  however,  such  a 
court  would  have  to  satisfy  the  contestants  and  the 
public  or  forfeit  its  existence,  and  the  only  mode  of  in- 
suring its  continuance  would  be  a  more  conservative 
policy  and  a  respecting  of  the  status  quo.     It  might 
appeal  to  the  probable  result  of  violent  contests  some- 
what less  than  a  purely  voluntary  tribunal  might  do, 
since  it  might  venture  to  give  o."f  Mise  to  employers  or 
to  workmen,  and  trust  to  the  support  of  the  general 
public ;  but  in  the  main  it  would  have  to  let  the  exist- 
ing rates  of  wages  continue  with  no  railical  change. 
Even  though  it  were  able  by  some  statistical  test  to 
discover  the  natural  rates  of  wages,  it  could  not  be 
bold  enough  rigorously  to  apply  them  without  for- 
feiting   its    existence.     Under    any    system,    then, 
whether  it  be  crude  contention,  conciliation,  volun- 
tary arbitration,  or  compulsory  arbitration,  the  rates 
fixed  by  the  present  half-savage  process  would  be 

2k 


c-i*; 


->:  ? 


498 


ESSENTIALS   OF   ECONOMIC   THEORY 


allowed  to  rule  till  the  process  itself  should  be  freed 
from  the  perversion  that  monopoly  causes.  Inequali- 
ties of  pay  would  be  tempered  in  different  degrees  by 
the  various  tribunals,  but  the  existing  rates  in  each 
employment  would  continue  to  furnish  a  basis  of 
adjustment. 

The  Most  Available  Plan  of  Arbitration.  —  Since 
there  is  little  prospect  that  compulsory  arbitration 
will  give  rates  of  wages  which  will  differ  materially 
from  those  secured  by  arbitration  of  the  voluntary 
sort,  the  latter  kind  has  the  preference,  so  long  as  it 
is  al)le  actually  to  prevent  the  strikes  and  lockouts 
which,  at  present,  are  so  wasteful  and  disorganizing. 
To  accomplish  this,  there  is  available  a  kind  of  arbi- 
tration which  is  voluntary,  but  has  behind  it  enough 
authority  to  make  actual  strikes  ver>-  rare.     By  this 
plan  the  state  recognizes  for  an  interim  the  laborers' 
tenure  of  place,  on  condition  that  they  continue  work- 
ing during   the   time  occupied   by  the  adjustment. 
If  they  stop  working  before  a  decision  is  announced, 
they  forfeit  their  tenure  of  positions.     When   the 
tribunal  announces  a  decision  as  to  the  terms  on  which 
labor  shall  go  on,  the  force  already  working  has  the 
option  of  retaining  the  positions  or  abandoning  them ; 
but  if  they  elect  to  leave  them,  it  must  be  with  the 
understanding  that  their  departure  is  definitive  and 
their  right  to  tenure  surrendered.     The  state  then 
uses  its  utmost  power  in  protecting  men  who  may 
occupy  the  vacated  places.   The  mere  prospect  of  this 
outcome  will  be  enough,  and  the  shifting  of  the  force 
will  not  have  actually  to  be  made,  since  the  right  of 
tenure  is  too  valuable  to  be  forfeited.     The  system 
requires  that  prompt  action  l>e  had  whenever  a  strike 
or  a  lockout  is  impending,  but  it  enforces  decisions 


WAGES    AS   FIXED   BY   ARBITRATION 


499 


only  by  imposing  on  workmen  who  choose  to  be  recal- 
citrant the  penalty  of  forfeiting  the  right  of  ownership 
of  positions,  the  claim  to  which  they  esteem  so  highly 
that  they  are  ready  literally  to  fight  in  defense  of  it. 

A  Mode  of  Dealing  with  Rebellious  Employers.  — 
An  employer  might  refuse  to  accept  the  result  of  an 
arbitration.  In  view  of  the  strong  pressure  that 
public  opinion  would  exert  after  the  decision  should 
have  been  rendered,  frequent  refusals  are  not  probable. 
If,  however,  the  employer  should  reject  an  award, 
the  logic  of  the  case  would  require  that  he  lose  his 
tenure  of  place  as  the  men  do  for  a  like  offense ;  and 
the  only  way  to  accomplish  this  is  to  throw  him  out  of 
his  business  connections.  The  tenure  which  an  entre- 
preneur most  values  consists  in  his  relation  to  his 
customers;  and  if  the  state  should  see  to  it  that  the 
goods  he  makes  could  always  be  had  from  some  other 
source,  the  entrepreneur  would  be  unlikely  to  close  his 
mills.  How  the  state  shall  keep  the  sources  of  supply 
open  will  become  an  important  question  if  it  shall 
appear  that  producers  do  defy  the  public  opinion 
and  reject  the  court's  awards.' 

The  Prar'i'cal  Working  of  the  Arbitration  Proposed. — 
Let  us  see  how  such  a  system  of  arbitration  as  is  here 
described  would  work  in  the  case  in  which,  as  we  have 
supposed,  a  strong  trade  union  is  dealing  with  a 
monopolistic  employer.  At  the  outset  all  violence  on 
the  men's  side  is  ruled  out.    No  assaulting,  maiming, 

'  If  the  employer  were  a  r'«rporatinn  possessing  a  monopoly 
of  its  department  of  produt  aon,  it  would  be  difficult  quickly  to 
open  such  new  sources  of  supply  as  would  be  requisite;  but 
u  temporary  reduction  of  import  duties  would  often  go  far  in 
V.r,  direction.  And  a  int-asure  wiiidi  would  insure  the  running 
of  th  plant  under  a  temporary  receivership  would,  of  course, 
do  it. 


>l 

h 


it 
'I 


^^mi^mjA.:,:.3^C;, 


500 


ESSENTIALS   OF   ECONOMIC  THEORY 


or  killing  of  so-called  "scabs"  is  tolerated,  and,  more- 
over, the  first  temptation  to  this  is  removed  by  the 
act  of  the  state  in  recognizing  for  an  interval  the  men's 
tenure  of  place.    There  are  no  strike  breakers  to  be 
attacked.    While  proceedings  of  arbitration  are  pend- 
ing, the  obnoxious  claas  is  out  of  sight,  and  all  the 
places  are  transiently  reserved  for  their  original  hold- 
ers.    The  court  has  submitted  to  it  two  possible  rat^ 
of  pay,  one  demanded  by  the  men  and  the  other  offered 
by  the  employers.     It  may  confirm  either  of  these 
rates  or  any  rate  that  is  intermediate  between  them, 
and  it  is  likely  to  pursue  the  latter  course.     In  any 
case,  it  announces  a  rate,  the  one  which  to  it  appears 
to  be  fair  and  is  more  likely  to  be  so  than  the  one 
claimed  by  either  of  the  parties.   "  This  is  a  just  rate," 
declares  the  tribuial  to  the  men;  "you  may  take 
it  O)  ii  ave  it,  but  if  you  leave  it  a  certain  thing  will 
happen,— workmen  who  refuse  it  will  forfeit  all  claim 
upon  their  positions."     Workmen  will  not  often  re- 
fuse the  award,  and  the  pressure  of  public  opinion 
makes  it  improbable  that  the  employer  will  do  so. 
Coupled  with  arbitration  and  an  essential  part  of  the 
system  is  a  policy  which  shall  remove  the  danger  of 
monopoly.     In  its  perfectly  secure  form  monopoly 
as  yet  scarcely  exists,  but  what  does  exist  is  a  great 
number  of  partial  monopolies  able  to  handle  competi- 
tors roughly  and  extort  profits  from  the  people.     Di- 
rectly connected  with  the  adjustment  of  wages  is  the 
disarming  of  such  monopolies.     The  preventing  of 
strikes  may  often  be  accomplished  without  this,  but 
the  insuring  of  just  wages  requires  it.     With  a  solution 
of  the  prol)lem  of  monopoly  in  view,  all  other  needs  of 
the  situation  might  well  be  met  by  arbitration  with- 
out compulsory  power. 


WAGES    AS    FIXRD    BY    ARBITRATION  501 

We  may  now  tabulate  our  conclusions. 

1.  In  the  making  of  the  wages  contract  the  indi- 
VKlual  laborer  is  at  a  disadvantage.  He  has  something 
which  he  must  sell  and  which  his  employer  is  not 
obliged  to  take,  since  he  can  reject  single  men  with 
impunity. 

2.  A  period  of  idleness  may  increase  this  disability 
to  any  extent.  The  vender  of  anything  which  must 
be  sold  at  onc(>  is  like  a  starving  man  pawning  his  coat 
—  he  must  take  whatever  is  offered. 

3.  Collective  bargaining  enables  men  tc  withhold 
for  a  time,  something  which  is  of  importance  to  an 
employer.     He  cannot  let  them  all  go  with  impunity 

4.  A  strike  is  a  contest  of  endurance;  and  if  it  con- 
tinues until  the  men  are  exhausted,  they  are  col- 
lectively in  the  position  of  the  hungry  individual  seller 
who  IS  at  the  buyer's  mercy.     The  wages  they  then 
take  may  be  far  below  the  natural  standard. 

5.  If  their  places  are  fille.l  at  once  by  men  who  are 
already  thus  necessitous,  the  resulting  rate  may  be 
equally  below  the  natural  .standard. 

6.  The  power  of  the  union  often  depends  on  its 
use  of  force  m  keeping  the  needy  out  of  its  field. 

7  The  rate  of  pay  gained  where  compulsion  is 
freely  and  successfully  practiced  is  above  the  normal 
rate. 

8.  Conciliation  does  little  in  the  way  of  changing  the 
results  which  are  realized  without  it,  but  it  lessens  the 
frequency  of  strikes. 

9.  Arbitration  by  a  court,  which  must  make  a  de- 
cision but  cannot  enforce  it  -  by  a  court  which  con- 
firms the  workmen's  tenure  of  place  while  action  is 
pending  and  declares  it  forfeited  if  the  men  reject 
Its  decree,  —  such  arbitration  would  secure  a  closer 


h 


*iJ»V:"-  V  ■j:-t,v<s^ 


602 


ESSENTIALS   OF   ECONOMIC  THEORY 


conformity  to  the  normal  standard  of  wages  than  any 
other  action.  It  would  establish  rates  which  give 
the  workmen  the  benefit  of  every  legitimate  advan- 
tage  from  collective  bargaining. 

10.  Arbitration  by  a  court  which  is  compelled  to 
act,  and  can  enforce  its  decision,  may  deviate  in  a 
particular  case  from  the  rate  of  pay  which  strikes 
would  yield;  but  if  the  deviation  is  frequent  and 
great,  it  will  induce  a  rebellion  against  the  system  of 
compulsory  arbitration.  The  rate  under  this  system 
cannot  differ  greatly  from  the  result  secured  with  no 
arbitration  at  all.  The  chief  value  of  all  the  foregoing 
modes  of  settling  disputes  lies  in  their  prevention  of 
costly  interruptions  of  business.  They  may  reduce 
the  number  of  strikes  and  prevent  much  waste  and 

suffering. 

11.  A  mode  of  procedure  which  aims  chiefly  to  end 
strikes  usually  depends  on  making  compromises  be- 
tween opposing  claims.  This  secures  an  approach  to 
a  reasonable  adjustment,  as  between  employers  and 
employed,  but  does  not  affect  the  differences  between 
the  wages  of  different  classes  of  laborers. 

12.  In  order  that  any  mode  of  adjusting  wafres 
may  give  fair  comparative  rates,  monopolies  must  be 
repressed;  and  this  can  only  be  accomplished  bv 
measures  which  are  independent  of  tribunals  of  arbi- 
tration. 


'•**vrv>9*-^T'%i9^wv9:*9 


CHAPTER  XXVII 

BOYCOTTS   A\D   Till;    LIMITIVfi    OF    PRODUCTH 

Whkn  frer  from  tho  taint  of  monopoly,  triido  unions, 
as  has  brcn  shown,  help  rather  than  hinder  the 
natural  forces  of  distribution.  Collective  bargaininK 
IS  normal,  but  barring  men  from  a  (iehi  of  employ- 
ment is  not  so.  Connected  with  this  undemocratic 
policy  are  certain  practice's  which  aim  to  benefit  some 
laborers  at  the  cost  of  others,  and  thus  tend  to  per- 
vert the  distributive  process. 

Hestrictions  ,m  the  Numhir  of  Mcwhers  in  n  Trade 

Vnion.  —  If  a  trade  union  were  altogether  a  private 

organization,  it  might  pro{)erly  control  the  numlxT  of 

its  own  members.     Before  it  is  formed  all  memt.ers 

of  the  craft  it  repres(>nts  are,  of  course,  non-union 

workers,  and  the  aim  of  the  founders  is  to  "unionize 

the  trade'  —that  is,  to  enlist,  in  the  membership  of 

the  bodv.  as  large  a  proportion  as  is  possible  of  the 

men  already  working  in  the  subgroup  whic  h  the  union 

repro«onT-      From  that  time  on   it  can  fix  its  own 

-^tancini  of  admission,  and  allow  its  membershij)  to 

iicrf-  :^'  slowly  or  rapidly  as  its  interests  may  .seem 

(^  ■i-ci-ite. 

ft-  'V  a  ton  Narrow  PoUcy  defeats  its  Onn  End.  — 

>r-  narrow  restrictions,  while  they  kee})  men  out  of 

ra^  anion,  attract  them  to  the  trade  itself.     An  ex- 

^^'^'^ce  scarritv  of  union  Inhnr  anA   iv,r<  u;^u   ^„,.    U 

-a. ,11.       tiij^ii     pa-,       il 

issiies  causes  the  establishment  of  new  mills  or  shops 
-JE   altogether   by  non-union   men.     If  these  mills 

503 


M 

f  !■■■ 


504 


ESSENTIALS   OF    ECONOMIC   THEORY 


and  shops  are  successful,  the  union  may  later  admit 
their  employees  to  membership ;  and  a  scries  of  suc- 
cessful efforts  to  produce  goods  by  the  aid  of  unor- 
ganized labor  thus  interferes  with  the  exclusive  policy 
of  unions.  The  number  of  their  members  grows  in 
spite  of  efforts  to  the  contrary. 

Free  Admi>^sion  to  a  Trade  Equivalent  to  Free  Ad- 
mission to  a  Union.  —  We  may  recognize  as  one  of  the 
principles  in  the  case  that  free  admission  to  the  craft 
itself  involves  free  admission  to  the  union.  When 
once  men  are  successfully  practicing  the  trade,  the 
union  is  eager  to  include  them,  though  it  enlarges  its 
own  membership  by  the  proces;3. 

How  a  Government  might  prevent  a  Monopoly  of 
Labor.  —  It  is  entirely  possible  that  a  government 
might  require  trade  unions  to  incorporate  themselves, 
and  might  include  in  the  charter  a  clause  refjuiring 
the  free  admission  of  qualified  members,  subject  only 
to  such  dues  as  the  reasonable  needs  of  the  union  might 
require.  That  is  not  an  immediate  probability,  but 
the  end  in  view  can  be  attained  by  making  member- 
ship in  the  trade  itself  practically  free  —  which  means 
protecting  from  violence  the  men  V'ho  practice  it 
without  joining  the  union.  This  is  not  difficult 
where  a  mill  in  an  isolated  place  is  run  altogether  by 
independent  labor,  and  it  is  natural  that  the  unions 
should  endeavor,  in  other  ways  than  the  crudely  ille- 
gal ones,  to  prevent  the  successful  running  of  such 
mills.  If  they  run  with  success,  their  employees 
will  have  to  be  attracted  into  the  unions.  A  measure 
designed  to  impede  the  running  of  non-union  mills 
is  the  boycott.  It  is  a  measure  which  does  not  in- 
volve force  and  which  is  yet  of  not  a  little  value  to 
workers. 


BOYCOTTS   AND   THE    LIMITING   OF    PRODUCTS      505 

The  Nature  and  Varieties  of  the  Boycott.  —  A  boy- 
cott is  a  concurrent  refusal  to  use  or  handle  certain 
articles.    In  its  original  or  negative  form,  the  boycott 
enjoins  upon  workers  that  they  shall  let  certain  speci- 
fied articles  alone.    If  they  are  completed  goods,  they 
must  not  buy  them  for  consumption;  and  if  they 
are  raw  materials,  or  goods  in  the  making,  they  must 
not  do  any  work  upon  tnem  or  upon  any  product  into 
which  they  enter.    They  may  thus  boycott  the  man- 
tels of  a  dwelling  house  and  refuse  to  put  them  in  posi- 
tion, or,  in  case  they  have  been  put  in  position  by  other 
workmen,  they  may,  as  an  extreme  measure,  refuse 
to  do  further  work  on  the  house  until  they  are  taken 
out.    A  producers'  boycott,  such  as  this,  falls  in  quite 
a  different  category  from  the  direct  consumers'  boy- 
cott, or  the  refusal  to  use  a  completed  article.    When 
a  raw  material  is  put  under  the  ban,  workers  strike  if 
an  employer  insists  on  using  it.    If  the  cause  of  the 
boycott  is  some  disagreement  between  the  maker  of 
the  raw  material  and  his  workmen,   the  measure 
amounts  to  the  threat  of  a  sympathetic  strike  in  aid 
of  the  aggrieved  workers.     If  the  cause  is  the  fact  that 
the  materials  were  made  in  a  non-union  shop,  the  men 
who  thus  made  them  have  no  grievance,  but  the  union 
in  the  trade  to  which  these  men  belong  has  one.    It 
consists  in  the  mere  fact  that  the  non-union  men  are 
working  at  the  trade  at  all  and  that  their  employer  is 
finding  a  market  for  their  product.     Workers  in  other 
trades  are  called  on  to  aid  this  union  by  a  sympathetic 
strike,  either  threatened  or  actually  put  into  effect. 
Such  a  boycott  as  this  may  therefore  be  described  as 
amounting  to  a  potential  or  actual  sympathetic  strike 
somewhat  stmtegioally  planned.     If  the  strike  actually 
comes,  it  may  assist  the  men  in  whose  cause  it  is  under- 


I 

1 

-■'l 

• 

\  \ 

\ 

i 

hi 

I 

506 


ESSENTIALS   OF   ECONOMIC  THEORY 


i    1 


taken ;  and  the  principles  which  govern  such  a  boycott 
are  those  which  govern  strikes  of  the  sympathetic 

kind. 

Direct  Consumers'  Boycotts  economically  LegUirmle. 
—  The  other  type  of  boycott  is  a  concurrent  refusal 
to  buy  and  use  certain  consumers'  goods.    Legally  it 
has  been  treated  as  a  conspiracy  to  injure  a  business, 
but  the  prohibition  has  lost  its  effectiveness,  as  legal 
requirements  generally  do  when  they  are  not  m  har- 
mony with  economic  principles.    Of  late  there  has 
been  little  disposition  to  enforce  the  law  against  boy- 
cotting, and  none  whatever  to  enforce  the  law  when 
the  boycott  carries  its  point  by  taking  a  positive  in- 
stead of  a  negative  form.    The  trade-label  movement 
enjoins  on  men  to  bestow  their  patronage  altogether 
on  employers  included  within  a  certain  list,  and  this 
involves  withdrawing  it  from  others ;  but  the  terms  of 
the  actual  agreement  between  the  workers  involve 
the  direct  bestowing  of  a  benefit  and  only  inferentially 
the  inflicting  of  an  injury.    The  men  do  not,  in  terms, 
conspire  to  injure  a  particular  person's  business,  but 
do  band  themselves  together  to  help  certain  other 
persons'  business.     Economic  theory  has  little  use  for 
this  technical  distinction.    It  is  favorable  rather  than 
otherwise  to  every  sort  of  direct  consumers'  boycott, 
and  is  particularly  favorable  to  the  trade-label  move- 
ment.   This  movement  may  powerfully  ai^sist  workers 
in  obtaining  normal  rates  of  pay,  and  it  will  not  help 
them  to  get  much  more. 

The  Ground  of  the  Legitimacy  of  the  Boycott.  —  An 
individual  has  a  right  to  bestow  his  patronage  where 
he  pleases,  and  it  is  essential  to  the  action  of  economic 
law  that  he  should  freely  use  this  right.    The  whole 

fabric  of  economic  society,  the  action  of  demand  and 


r/T  V,- 


BOYCOTTS   AND  THE   LIMITING   OF   PRODITCTS      507 

supply,  the  laws  of  price,  wages,  etc.,  rest  on  this 
basis.  Modem  conditions  require  that  large  bodies 
of  individuals  should  be  able  concurrently  to  exercise 
a  similar  right,  —  that  organized  labor  should  bestow 
its  collective  patronage  where  it  wishes.  This  can  be 
done,  of  course,  only  by  controlling  individual  mem- 
bers, for  the  trade  union  does  not  buy  consumers' 
goods  collectively.  If  it  can  thus  control  its  members, 
it  can  use  in  promoting  its  cause  the  extensive  pat- 
ronage at  its  disposal. 

Unfavorable  Features  of  the  Indirect  Boycott.  —  The 
boycott  we  have  thus  far  had  in  view  is  a  direct  con- 
fining of  union  laborers'  patronage  to  union-made 
goods.  Why  this  is  a  thing  to  be  encouraged  we 
shall  presently  see.  What  we  have  said  in  favor  of  it 
does  not  apply  to  boycotting  merchants  on  all  their 
traffic  because  they  deal  in  certain  goods.  If  a  brand 
of  soap  is  proscribed,  the  workers  are  justified  in  con- 
currently refusing  to  use  that  variety;  but  it  is  not 
equally  legitimate  to  prevent  a  merchant,  whose 
function  it  is  to  serve  the  public,  from  selling  this 
soap  to  the  customers  who  want  it.  To  refuso  to  buy 
anything  whatsoever  from  a  merchant  because  he 
keeps  in  his  stock  a  prohibited  article,  and  sells  it  to  a 
different  set  of  customers,  is  interfering,  in  an  un- 
warranted way,  with  the  freedom  of  the  merchant 
and  of  the  other  customers.  Indirect  consumers' 
boycotts  have  little  to  commend  them,  but  those  of 
the  direct  kind  have  very  much. 

The  Merits  of  the  Trade-label  Movement. —Thii^ 
appears  most  clearly  in  connection  with  the  trado- 
label  movement.  As  a  result  of  this  movement  union 
laborers  will,  a.9  is  hoped,  buy  only  union-made  goods. 
The  existence  of  such  a  movement  in  itself  implies 


ti 


?  1 


II 


508 


ESSENTIALS  OP  ECONOMIC  THEORY 


that  there  are  goods  of  the  same  sort  to  be  had  which 
are  not  made  by  union  labor.  The  shop  that  is  run 
by  the  aid  of  independent  labor  is  the  cause  of  the 
existence  of  the  union  label.  If  all  the  labor  in  a 
group  were  organized,  the  label  would  have  no  sig- 
nificance. At  present  the  trade  unions  offer  to  an 
employer  a  certain  amount  of  patronage  as  a  return 
for  limiting  himself  to  union  men,  and  so  long  as  the 
cost  of  making  his  goods  is  not  much  increased,  the 
inducement  may  be  sufficient  to  make  him  do  it. 

The  Movement  as  affected  by  Extravagant  Demands 
on  Employers.  —  Unduly  high  wages  mean,  of  course, 
unduly  high  prices.    Without  here  taking  account  of 
the  "  ca'-canny  "  policy,  which  aims  to  make  labor  in- 
efficient, extravagant  wages  for  efficient  labor  increase 
the  cost  of  goods.    This  opens  the  way,  as  we  have 
seen,  for  the  free  shop  and  the  labor  which  is  willing 
to  sell  its  product  at  a  cheaper  rate.    If  union  labor 
then  firmly  resolves  to  buy  only  the  goods  with  tho 
label,  it  proposes  a  heroic  measure  of  self-taxation. 
Trade  Labels  and  the  Quality  of  Goods.  —  The  ex- 
perience of  the  trade-label  movement  thus  far  has 
been,  that  in  some  instances  the  label  vouches  for 
prices  which  are  high,  if  quality  be  considered,  or  for 
a  quality  which  is  poor  if  the  prices  are  the  current 
ones.    Instead  of  telling  the  purchaser  that  the  shoes, 
hats,  cigars,  etc.,  which  bear  the  label  are  surely  the 
best  that  can  be  had  for  the  money,  the  labels  are 
more  apt  to  tell  him  that  the  goods  arc  poorer  than 
others  which  can  be  had.    In  some  instances  this  is 
not  the  case,  and  the  union-made  articles  are  as  good 
and  as  cheap  as  others.    When  the  label  stands  for  a 
high  price  or  a  poor  quality,  the  union  fails  to  :on 
trol  its  members  and  especially  its  members'  wives. 


BOYCOTTS   AND   THE    LIMITING   OF   PRODUCTS      509 


Having  the  meager  pay  of  a  week  to  invest,  the  wife 
needs  to  use  it  where  it  will  do  the  most  for  the  family. 
There  is  so  strong  an  inducement  to  buy  goods  which 
are  really  cheap  and  good  that  the  trade-label  move- 
ment fails  whenever  loyalty  to  it  means  very  much  of 
self-taxation. 

The  Object  Lesson  of  the  Consumers'  Boycott.  —  Or- 
ganized labor  gives  itself  a  costly  and  impressive  ob- 
ject lesson  when  it  tries  to  force  all  men  of  its  class 
to  buy  the  dearer  of  two  similar  articles.  What  this 
shows  is  that  the  demands  of  unions  must  be  limited, 
and  that  for  the  highest  success  they  must  be  so  limited 
tbat  there  shall  be  no  decisive  advantage  given  to 
an  employer  who  has  a  non-union  shop.  A  marked 
difference  in  costs  of  production  will  cause  the  free 
shop  to  grow  and  the  union  shop  to  shrink.  A  certain 
moderate  difference  in  wages  tliere  may  be,  provided 
always  that  the  union  labor  is  highly  efficient;  but 
more  than  such  a  difference  there  cannot  safely  be. 
If  the  trade-label  movement  should  be  generally 
successful,  that  fact  would  prove  that  the  demands 
of  trade  unions  were  kept  within  reasonable  limits. 

The  Policy  of  Restricting  the  Product  of  Labor.  —  It 
is  a  part  of  the  policy  of  trade  unions  to  limit  the  inten- 
sity of  labor.  The  term  "ca'-canny"  means  working 
at  an  easy-going  pace,  which  is  one  of  the  methods 
adopted  in  order  to  make  work  for  an  excessive  num- 
ber of  men.  For  some  of  this  the  motive  is  to  avoid 
an  undue  strain  on  the  workers.  If  the  employer 
selects  "pacemakers,"  who  have  exceptional  ability 
and  endurance,  and  tries  to  bring  other  laborers  to 
their  standard,  then  the  rule  of  the  trade  union,  which 
forbids  doing  more  than  a  certain  amou  of  work  in  a 
day,  becomes  a  remedy  for  a  real  evil  —  the  excessive 


k 


Si 

.1 


510 


ESSENTIALS  OF  ECONOMIC  THEORY 


nervous  weai  of  too  strenuous  labor.  This,  however, 
by  no  means  proves  that  the  policy  as  carried  out  is  a 
good  Beyond  the  relief  that  comes  when  undue 

speeding  of  machinery  and  driving  of  workers  is  re- 
pressed, it  will  be  impossible  to  prove  that  in  the  long 
run  there  is  any  good  whatsoever  in  it,  and  the  evil 
in  it  is  obvious  and  deplorable. 

"Making  Work"  as  related  to  Technical  Progreaa.  — 
The  policy  reverses  the  effects  of  progress.    That 
which  has  caused  the  return  to  labor  to  grow  steadily 
larger  is  labor  saving  or  product  multiplying,  and  labor 
making  and  product  reducing  are  the  antithesis  of  this. 
Enlarging  the  product  of  labor  has  caused  the  stand- 
ard of  pay  to  go  steadily  upward  and  the  actual  rate 
to  follow  it ;  and  the  prospect  of  a  future  and  perpetual 
rise  in  the  laborers'  standard  of  living  depends  almost 
entirely  on  a  continuance  of  this  product-multiplying 
process.    A  single  man  maintaining  himself  in  isola- 
tion would  gain  by  everything  that  made  his  efforts 
fruitful,  and  society,  as  a  whole,  is  like  such  an  isolated 
man.    It  gains  by  means  of  every  effective  tool  that 
is  devised  and  by  every  bit  of  added  efficiency  in  the 
hands  that  wield  it. 

Reversing  the  Effect  of  Progress.  —  It  follows  that 
undoing  such  an  improvement  and  going  back  to  ear- 
lier and  less  productive  methods  would  reverse  the 
effect  of  the  improvement,  which  is  higher  pay  for 
all ;  it  is  restoring  the  condition  in  which  the  product 
of  labor  and  its  pay  were  lower.  The  "  ca'-canny " 
policy  — the  arbitrary  limiting  of  what  a  man  is 
allowed  to  do  —  has  this  effect.  It  aims  to  secure  a 
reduction  of  output,  not  by  enforcing  the  use  of  in- 
ferior tools,  but  by  enforcing  the  inferior  use  of  the 
customary  tools.    The  effect,  in  the  long  run,  is,  and 


BOYCOTTS  AND  THE  LIMITING   OF  PRODUCTS      511 

must  be,  to  take  something  out  oi  the  laborers' 
pockets. 

The  Effect  of  the  Work-making  Policy  under  a  Rigime 
of  Strong  Trade  Unions.  —  It  is,  of  course,  only  a 
strong  trade  union  that  can  enforce  such  a  policy  as 
this.  Making  one's  own  work  worth  but  little  offers 
a  large  inducement  to  an  employer  to  hire  some  one 
else  if  he  can.  Within  limits,  the  powerful  union 
may  prevent  him  from  doing  this,  and  if  for  the  time 
being  society  is  patient  and  tolerant  of  anarchy,—  if 
it  allows  men  who  are  willing  to  work  well  in  a  given 
field  to  be  forcibly  excluded  from  it  by  men  who  are 
determined  to  work  ill,— the  policy  may  be  carried 
to  disastrous  lengths. 

How  Static  Law  thwarts  the  Work-making  Policy.  — 
Even  strong  unions,  as  we  have  seen,  succeed  in  main- 
taining only  a  limited  difference  of  pay  between  their 
trade  and  others.  The  effort  to  maintain  an  excessive 
premium  on  labor  of  any  kind  defeats  itself  by  induc- 
ing free  labor  to  break  over  the  barrier  that  is  erected 
against  it.  The  same  thing  happens  when  we  reduce 
the  productive  power  of  organized  labor.  If,  at  a 
time  when  the  premium  that  union  labor  bears  above 
the  non-union  kind  is  at  a  maximum,  the  policy  of  re- 
stricting products  is  introduced,  it  so  increases  the 
inducement  to  depend  on  an  independent  working 
force  that  there  is  no  resisting  it.  The  palisade  which 
union  labor  has  built  about  its  field  gives  way,  and  other 
labor  comes  freely  in.  If  the  oa'-canny  policy  makes 
it  necessary  to  pay  ten  men  for  doing  five  men's  work, 
the  union  itself  will  have  to  give  place  to  the  inde- 
pendent men.  No  single  good  word  can  be  said  for 
the  ultimate  effect  of  the  policy  as  carried  beyond  the 
moderate  limit  required  by  hygiene.     Up  to  the  point 


il 


i  rf3 


612  ESBENTIALS   OF   ECONOMIC  THEORY 

at  which  it  will  avert  undue  pressure  upon  workers 
stop  disastrous  driving  and  the  early  disabling  of 
men,  the  effect  is  so  good  as  amply  to  justify  the  reduc- 
tion of  product  and  pay  which  the  policy  occasions. 
Beyond  that  there  is  nothing  whatever  to  be  said  for  it 
and  if  it  shall  become  a  general  and  settled  policy  of 
trade  unions,  it  will  be  a  clog  upon  progress  and  mean 
a  permanent  loss  for  every  class  of  laborers. 

Notwithstanding  all  this,  it  must  be  truo  that  some 
motive  which  can  appeal  to  reasonable  beings  impels 
workers  to  this  policy.    No  plan  of  action,  as  general 
as  this,  can  be  sustained  unless  some  one,  at  least  tran- 
siently, gains  by  it.     Workers  have  a  tremendous 
stake  in  the  success  of  any  plan  of  action  they  adopt, 
and  they  have  every  motive  for  coming  to  a  right  con- 
clusion concerning  it.    They  are  in  the  way  of  getting 
object  lessons  from  every  mistaken  policy,  as  its  per- 
nicious effects  become  apparent,  even  though  some 
local  and  transient  good  effects  also  become  evident. 
It  is  not  difficult  to  see  what  it  has  been  that  has 
appealed  to  so  many  laborers  and  induced  them  volun- 
tarily to  reduce  the  value  of  their  labor. 

A  Common  Argument  against  Product  Restricting.— 
WTiat  is  commonly  said  of  the  policy  is  that  it  is  based 
on  the  idea  that  there  is  a  definite  amount  of  work  of 
each  kind  to  be  done,  and  that  if  a  man  does  half  as 
much  as  he  could  do,  twice  as  many  men  will  be  cm- 
ployed  to  do  the  whole  amount.    Nobody  who  thinks 
at  all  actually  believes  that  the  amount  of  \^ork  of  a 
given  kind  is  fixed,  no  matter  how  much  is  charged  for 
it.    If  workers  on  buildings  charged  from  five  to  ten 
dollars  a  day,  there  would  be  fewer  houses  erected 
than  would  be  erected  if  they  charged  three  dollars; 
and  the  same  thing  is  true  everywhere.    The  amount 


:i^^i^.iamM^. 


BOYCOTTS   AND   THE   LIMITING   OF   PRODUCTS      513 

of  labor  to  be  done  in  any  field  of  employment  varies 
constantly  with  changes  of  cost,  antl  making  labor 
more  costly  in  a  particular  department  reduces  the 
amount  of  its  product  that  can  be  sold. 

A  trade  union  often  finds  that  there  are  too  many 
workers  in  its  field  to  be  constantly  employed  at  the 
rate  of  pay  it  establishes.  The  result  is  partially 
idle  labor;  the  men  work  intermittently,  and  though 
the  high  wages  the/  get  for  a  part  of  their  time  may 
compensate  them  for  idle  days  or  weeks,  the  idleness 
which  is  the  effect  of  the  oversupply  is  inevitable. 

A  given  number  of  workers  in  the  group  which 
makes  A'"  when  the  wages  are  three  dollars  a  day 
becomes  an  excessive  number  when  the  wages  are  five, 
and  even  if  the  high  wages  do  not  attract  men  from 
without  and  make  the  absolute  number  of  workers 
greater  than  before,  employment  is  not  constant.    The 
ca'-canny  policy  is  a  transient  remedy  for  this.    It  is 
an  effort  to  avoid  the  necessity  for  partial  idleness  and 
for  the  transferring  of  laborers  to  other  occupations. 
All  the  labor  may,  for  a  time,  remain  in  its  present 
field  if  it  will  afflict  itself  with  a  partial  paralysis.    For 
a  while  the  demand  for  the  product  of  the  labor  will  be 
sufficient  to  give  more  constant  employment.    Time  is 
required  for  the  full  effect  of  the  product-limiting  policy 
to  show  itself  in  a  falling  off  of  the  consumption  of  the 
goods  whose  cost  is  thus  increased.     When  it  comes  the 
evil  effect  of  the  policy  will  appear.    If  a  union  were 
strong  enough  to  keep  a  monopoly  of  its  field,  in  spite 
of  the  greater  efficiency  of  laborers  that  are  free  to 
work  in  a  normal  way,  it  would  be  strong  enough  to 
maintain  much  higher  pay  for  its  own  members  if  it 
limited  the  number  of  them  and  encouraged  them  to 
work  efficiently.    The  strongest  conceivable  union 

2l 


k 


514 


ESSENTIALS  OK   ECONOMIC  THEORY 


must  lose  by  substituting  the  plan  of  paralyzing  labor 
for  that  of  restri"ting  the  number  of  laborers.    The 
union  may  choose  to  take  the  benefit  of  its  monopo- 
listic power  by  keeping  an  unnecessarily  large  num- 
ber of  men  in  constant  employment,  rather  than  by 
getting  high  wages  for  efficient  work ;  but  in  that  case 
any  union  but  one  the  strength  of  which  is  maintained 
in  some  unnatural  way  is  likely  to  come  to  grief  by 
the  great  preference  it  creates  for  non-union  labor. 
The  independent  shop  will  get  the  better  men  at  the 
lower  rate  of  wages,  and  its  products  will  occupy  the 
market.    The  popularity  of  the  plan  of  work  making 
is  the  effect  of  looking  for  benefits  which  are  transient 
rather  than  permanent.    If  it  were  carried  in  many 
trades  as  far  as  it  already  is  in  some,  it  would  probably 
neutralize,  even  for  those  who  resort  to  it,  much  of  the 
benefit  of  organization,  and  work  still  greater  injury 

to  others.' 

TJie  Eight-hour  Movement  as  a  Work-making  Policy. 
—  The  effort  to  reduce  the  hours  of  labor  to  eight  per 
day  has  in  it  so  much  that  is  altogether  beneficent 
that  it  is  not  to  be  put  in  the  same  category  with  the 
ca'-canny  plan  of  working.  And  yet  one  leading  argu- 
ment in  favor  of  this  leducing  of  the  number  of  hours 
of  work  is  identical  with  that  by  which  a  reduction  of 
the  amount  accomplished  in  an  hour  is  defended.  The 
purpose  is  to  make  work  and  secure  the  employment 
of  more  workers.    What  has  been  said  of  the  other 


>  It  will  be  seen  that  whether  the  policy  is  successful  m  giv- 
ing employment  to  the  partially  idle  or  fails  to  do  so  depends 
on  the  amount  of  reduction  in  the  sale  of  the  goods  which  the 
incrca^d  cost  of  making  them  entnils;  and  if  the  market  is 
highly  sensitive  to  increased  cost,  the  policy  may  fail  m  secur- 
ing  even  a  transient  increase  of  employment. 


BOYCOTTS  AND  THE   LIMITINa   OF   PRODUCrS     515 

mode  of  work  making  applies  here.  Reducing  the 
length  of  the  working  day  cuts  down  the  product  that 
workers  create  and  the  amount  that  they  get.  In 
the  main  the  loss  of  product  is  probably  offset  by 
the  gain  in  rest  and  enjoyment;  but  the  loss  of  prod- 
uct, taken  by  itself  alone,  is  an  evU,  and  nothing 
can  make  it  otherwise.  If  the  hours  were  further 
reduced,  the  loss  would  be  more  apparent  and  the 
gain  from  rest  and  leisure  would  be  less. 

One  Sound  Argument  in  Favor  of  the  Greater  Pro- 
ductivUy  of  the  Eight-hour  Day.  —  There  is  one  reason 
why  the  eight-hour  day  may  in  a  series  of  generations 
prove  more  permanently  productive  than  a  longer  one. 
It  may  preserve  the  laborers'  physical  vigor  and  enable 
them  to  keep  their  employment  to  a  later  period  in 
life.    The  dead  line  of  sixty  might  be  obliterated. 

If  what  we  wanted  were  to  get  the  utmost  we  could 
out  of  a  man  in  a  single  day,  we  should  do  it  by  mak- 
ing him  work  for  twenty-four  hours;    after  that,  for 
another  twenty-four  hours,  he  would  be  worth  very 
little.    If  we  expected  to  make  him  work  for  a  week, 
we  should  probably  shorten  the  day  to  eighteen  hours! 
If  we  expected  to  employ  him  for  a  month  and  then 
to  throw  him  aside,  we  might  possibly  get  a  maximum 
product  by  making  him  work  fourteen  hours.    If  we 
wanted  him  for  a  year  only,  possibly  a  day  of  twelve 
hours  would  insure  the  utmost  he  could  do.     In  a 
decade  he  could  do  more  in  a  ten-hour  day,  and  in  a 
working  lifetime  he  could  probably  do  more  in  eight. 
Forty  or  fifty  years  of  continuous  work  would  tell 
less  on  his  powers  and  on  the  amount  and  quality  of 
his  product. 

The  Connection  between  the  Restriction  of  Products 
and  the  Trade-label  Movement.  —  Very  important  is 


■  i 

^  -i 


I     I       ^ 

-'11  i 


616  ESSENTIALS  OF   ECONOMIC  THEORY 

the  bearing  of  these  facts  concerning  the  restriction 
of  laborers'  products  and  the  trade-label  movement 
If  that  movement  should  become  niore  general  ami 
effective,  it  would  bring  home  to  all  who  should   ake 
part  in  it  the  effects  of  the  labor-paralyzing  policy. 
The  faithful  trade  unionist  would  find  himself  paying 
a  full  share  of  the  bill  which  that  policy  entails  on 
the  public.    Ordinary  customers  can  avoid  the  prod- 
uct whose  cost  is  enhanced  by  the  trade-union  rules; 
but  the  unionist  must  take  it  and  must  make  himself 
and  his  cla^s  the  chief  subjects  of  the  tax  which  en- 
Tanced  prices  impose.    It  may  well  be  that  the  per- 
nicious quality  of  the  general  work-making  policy 
will  become  so  evident  in  any  case  that  it  will  be 
abandoned;  and  this  would  be  made  sure  by  a  rule 
that  should  actually  make  union  labor  the  chief  pur- 
chaser of  union  goods.    Ca'-canny  would  then  mean 
self-taxation  on  a  scale  that  no  arguments  could  make 
popular. 


.■i~-* 


■"^^^'m^m^' 


-^w^^mm^ 


m 


■^  •■■ 


CHAPTER  XXMII 

PROTECTION  AND  MONOPOLY 

The  more  serious  perversions  of  the  economic  sys- 
tem which  we  have  encountered  have  all  been  trace- 
able to  some  working  of  the  principle  of  monopoly, 
and  it  is  important  to  know  whether  any  established 
policy  of  governments  lends  force  to  this  evil  influence. 
Import  duties  were  established  in  America  for  the  pur- 
pose of  protecting  industries  as  such,  and  a  vital  ques- 
tion now  is  whether  they  have  now  begun  to  protect 
monopolies  within  the  industries. 

A  Supposed  Conflict  between  Theory  and  Practice.  — 
There  was  a  time  when  theorists  and  practical  men 
seemed  to  be  in  hopeless  disagreement  concerning  the 
entire  subject  of  protection.    In  the  view  of  the  prac- 
tical man  an  economist  was  a  person  who,  in  his  study, 
had  reached  certain  conclusions  which  were  equally 
unanswerable  in  themselves  and  irreconcilable  with 
the  facts.    The  expression  most  commonly  heard  in 
this  connection  was  that  "theory  and  practice  do  not 
agree."    The  doctrinarians  were,  in  those  days,  unusu- 
ally harmonious  among  themselves,  for  there  were 
comparatively  few  who  made  a  vigorous  defense  of 
protection  on  grounds  of  economic  principle.     The 
practical  world  was  less  harmonious,  since  the  views  of 
different  parts  of  it  were  colored  by  differing  interests; 
but  the  fact  that  science  did  not  fall  into  self-contra- 
diction was  encouraging.    It  was    ->ssible  for  the  un- 
compromising free-trader  to  think  and  to  say  that  fun- 

617 


I. 


1. 


ft  a 


518 


ESSENTIALS   OF  ECONOMIC  THEORY 


damental  principles  were  all  on  his  side,  and  that  the 
protectionist  had  nothing  in  his  favor  except  transient 
disturbances  that  interfered  with  the  perfect  working 
of  the  principles. 

Static  Theory  in  Favor  of  Free  Trade.— ^ow,  the 
business  world  conceded  too  much  to  the  free-trader 
when  it  said  that  he  had  theory  altogether  in  his 
favor.    What  he  could  truthfully  claim,  and  what  the 
world  could  safely  admit,  was  that  he  had  static  theory 
in  his  favor.    Static  theory  deals  with  a  world  which 
is  free,  not  only  from  friction  and  disturbance,  but 
also  from  those  elements  of  change  and  progress 
which  are  the  marked  features  of  actual  life.    Stop 
all  the  changes  that  are  taking  place  in  the  industrial 
life  of  the  world;   put  an  end  to  inventions  and  im- 
provements in  business   organization;  let  there  be 
no  moving  of  population  to  and  fro,  and  no  increase 
of  the  aggregate  population  of  the  world;  further, 
let  there  be  no  addition  to  the  wealth  of  the  world 
and  no  change  in  its  forms,— and  you  will  have  the 
static  state  described  in  the  early  part  of  this  treatise. 
Men  would  go  on  making  things  to  the  end  of  time, 
using  identically  the  same  methods  that  are  now  in 
vogue  and  getting  identically  the  same  results,  and  in 
such  an  imaginary  world  there  would  be  no  possibility 
of  answering  the  contention  of  the  general  body  of 
economists  of  a  generation  ago.    Free  trade  would  be 
the  only  rational  policy,  and  it  could  be  defended  upon 
the  simple  ground  on  which  division  of  labor  in  the  case 
of  individuals  is  defended.    One  man  has  an  aptitude 
for  making  shoes,  another  for  making  watches,  an- 
other for  painting  pictures,  and  so  on ;  and  each  one  of 
them  can  gain  far  more  by  devoting  himself  to  his 
specialty  and  bartering  off  the  product  of  it  than  he 


r&fm^if^^mm' 


PROTECTION    AND   MONOPOLY 


519 


can  by  trying  to  make  everything  for  himself.  Na- 
tions have  their  special  aptitudes  and  should  follow 
them,  and  make  all  they  can  out  of  them ;  and  the 
nation  which  has  special  facilities  for  producing  cot- 
ton, or  wheat,  or  petroleum,  or  gold  and  silver  bullion 
should  devote  itself  to  its  specialties,  barter  off  the 
results,  and  get  all  manner  of  gooclo  in  return. 

Wastes  from  Protection  reduced  by  the  Fact  of  Di- 
versified Resource.'^.  —  It  is  true,  indeed,  that  a  great 
nation  like  our  own  makes  a  much  better  jack-of-all- 
trades  than  an  individual  can  make.    It  is  far  more 
probable  that  the  nation  as  a  whole  can  produce  with- 
cul  much  waste  all  the  things  it  wants  to  use  than  that 
any  individual  can  do  so.     If  we  have  all  climates  from 
the  tropi    '  to  the  arctic,  all  soils,  and  a  full  list  of 
mineral  deposits,  why  should  it  pay  us  to  confine 
ourselves  to  the  making  of  only  a  few  things  in  order 
to  barter  them  ofT  for  others?    Why  should  we  not, 
with  our  wide  -ange  of  resources,  make  everything  ? 
Undoubtedly  we  can  make  almost  everything  if  we 
insist  upon  doing  it ;  but  there  are  still  some  things  that 
other  countries  can  make  and  sell  to  us  on  such  terms 
that  we  can  do  better  by  buying  them  than  by  pro- 
ducing them  ourselves.    We  can   raise  tea  in  the 
United  States,  but  it  pays  us  better  to  make  something 
else  and  barter  it  off  for  tea.    A  day's  lalwr  spent  in 
raismg  cotton  to  send  away  in  exchange  gives  us  more 
tea  than  a  day's  labor  spent  in  producing  the  latter 
article  directly.     In  a  static  condition  we  should  have 
found  in  what  fields  it  is  most  profitable  to  employ 
our  energies.     We  should  be  directly  making  things 
that  it  would  pay  us  best  to  make,  and  we  should  be 
indirectly  makmg  the  other  things ;  that  is,  we  should 
be  producing  a.ticles  to  send  off  in  exchange  for  those 


.1 
11 


520 


ESSENTIALS  OF  ECONOMIC  THEORY 


Other  things.  Wherever  an  indirect  way  of  acquiring 
a  thing  had  proved  most  profitable,  we  should  have 
adopted  that  method,  and  we  should  always  adhere 
to  it.  Anything  that  forced  us  to  make  directly 
something  which  we  could  secure  in  greater  abundance 
by  bestowing  the  labor  that  would  make  it  on  making 
something  else,  would  turn  our  energies  in  a  compara- 
tively unproductive  direction.  It  would  inflict  on  us 
a  waste  and  a  loss  —  and  there  are  such  wastes  and 
losses  inherent  in  the  operation  of  the  principle  of  pro- 
tection, and  there  is  no  contending  against  the  argu- 
ment that  demonstrates  their  existence.  Protection 
and  a  certain  distortion  of  the  productive  system, 
a  certain  misdirection  of  energy,  are  synonymous. 

The  Argument  for  Protection  Dyrmmic.  —  Now  an 
intelligent  argument  in  favor  of  protection  begins  at 
this  point.    It  accepts  the  whole  static  argument  in 
favor  of  free  trade,  and  its  own  assertion  begins  with  a 
"nevertheless."    It  claims  that  in  spite  of  what  is 
thus  conceded,  protection  is  justifiable,  since,  in  the 
end,  it  will  pay,  uotwithstanding  the  wastes   that 
attend  it.    The  argument  for  protection  is  entirely  a 
dynamic  one.    It  is  based  on  the  fact  of  progress  and 
admits  that  it  could  make  no  case  for  itself  under  the 
conditions  of  a  static  state.    If  every  country  had  cer- 
tain special  facilities  for  producing  particular  thmgs, 
and  if  its  state  in  this  respect  were  destined  to  remam 
forever  unchanged,  it  could,  to  the  end  of  time,  make 
itself  richer  by  depending  for  many  things  on  its 
neighbors  than  it  could  by  depending  for  those  things 
immediately  on  itself.    The  fact  is,  however,  that  a 
nation  like  our  own  abounds  in  undeveloped  and  even 
unknown  resources  which,  when  brought  to  the  light, 
may  take  precedence  of  many  of  those  which  are 


-mk 


PROTECTION   AND  MONOPOLY 


521 


known  and  utilized.    If  our  country  from  end  to  end 
were  like  Cape  Nome,  and  as  rich  in  gold  as  the  richest 
part  of  that  remote  region,  and  if  it  were  certain  that 
the  deposits  of  gold  would  never  be  exhausted  and  would 
employ  the  whole  energy  of  our  people,  it  is  clear  that 
we  should  have  one  staple  occupation  and  should  de- 
pend upon  the  rest  of  the  world  for  almost  every  sort 
of  portable  commodity.    We  should  be  stopped  from 
manufacturing  by  the  great  productivity  of  labor  in 
placer  mining.    So  long  as  men  could  make  ten  dol- 
lars a  day  by  washing  out  gold  from  the  sands,  there 
would  be  no  use  in  setting  them  at  work  making  two 
dollars  a  day  as  weavers  or  shoemakers  or  what  not. 
By  buying  our  cloth  with  gold  dust  we  could  get  far 
more  of  it  than  we  could  if  we  took  the  men  out  of  the 
mine  and  set  them  to  making  the  stuflf  itself.    But  — 
and  here  is  the  proviso  that  makes  the  supposition 
correspond  with  the  fact  —  if,  besides  the  placers, 
we  had  deep  mines  of  other  metals  than  gold,  if  we 
had  oil  and  lumber  and  loam  of  every  variety,  and  if 
we  had  people  with  undeveloped  mechanical  aptitudes, 
it  might  be  that  we  should  do  well  to  develop  these 
latent  energies  even  in  a  wasteful  way.    The  condi- 
tion that  would  fully  establish  the  similarity  between 
the  supposed  case  and  the  actual  one  is  that  the  placer 
deposits  should  be,  as  placers  are,  sure  to  be  exhausted 
by  continued  working,  and  that  producing  other  things 
than  gold  should  tend  to  become,  with  time,  a  more 
and  more  fruitful  process.    We  can  justify  the  attitude 
of  the  country  that  taxes  itself  at  an  (>.arly  date  for  the 
sake  of  testing  and  developing  the  latent  aptitudes 
of  its  land  and  its  people.    At  the  outset  it  will  thereby 
sustain  a  loss,  because  at  the  outset  it  can  gain  more 
goods  by  the  indirect  method  of  exchange  than  it  can 


522 


ESSENTIALS  OF   ECONOMIC  THEORY 


by  production;  but  there  may  easily  come  a  time 
when  it  can  gain  more  by  the  direct  method.  If  we 
learn  to  make  things  more  economically  than  we  could 
originally  make  them,  if  we  hit  upon  cheap  sources  of 
motive  power  and  of  raw  material,  and  especially  if 
we  devise  m.jhlnery  that  works  rapidly  and  accurately 
and  greatly  multiplies  the  product  of  a  man's  working 
day,  we  shall  reach  a  condition  in  which,  instead  of  a 
loss  incidental  to  the  early  years  of  manufacturing, 
we  shall  have  an  increasing  gain  that  will  continue 
to  the  end  of  time.  It  may  be,  further,  that  without 
protection  and  the  burdensome  tax  which  it  did  un- 
doubted'} 'mpose  upon  us,  we  should  have  had  to  wait 
far  too  long  for  this  gain  to  accrue  and  should  have 
sacrificed  the  benefits  that  come  from  a  long  interval 
of  diversified  and  fruitful  industry. 

In  short,  the  static  argument  for  free  trade  is  un- 
answerable and  the  dynamic  argument  for  protection, 
when  intelligently  stated,  is  equally  so.  The  two  argu- 
ments do  not  meet  and  refute  each  other,  but  are 
mutually  consistent.  It  is  possible  to  ridicule  the 
argument  for  protection  under  the  name  of  the  "  infant 
industry"  argument,  and  it  is  possible  for  the  policy 
it  upholds  to  continue  long  after  this  argument  has 
ceased  to  be  valid.  The  overgrown  infant  will  have 
sacrificed  his  claim  for  coddling,  but  that  will  not  prove 
that  there  was  never  a  time  when  he  needed  it. 

The  Policy  demanded  in  View  of  Facts  Static  and 
Dynamic.  —  Now,  there  is  an  argument  for  tariff 
reduction  which  accepts  both  the  static  argument 
for  free  trade  and  the  dynamic  argument  for  protec- 
tion. In  fact,  it  bases  itself  on  the  protectionist's 
modem  and  intelligent  claim.  To  advance  in  any 
form  the  infant  industry  argument  is  to  admit  that 


^fimi^ 


PROTECTION    AND   MONOPOLY 


523 


the  policy  advocated  is  temporary.  Protective  duties 
are,  in  fact,  self-testing.  They  reveal  in  their  very 
working  whether  they  were  originally  justifiable  or 
not.  The  ground  on  which  they  were  imposed  is  that 
they  would  develop  latent  resources  —  that  they 
would  enable  labor  to  produce  as  much  by  making  a 
class  of  articles  formerly  produced  in  foreign  countries 
as  it  could  produce  by  engaging  in  industries  already 
established  and  exchanging  their  products  for  the 
former  articles.  If  that  time  should  come,  the  indus- 
try that  had  to  grow  up  originally  under  the  protection 
of  a  duty  would  become  so  fruitful  that  it  could  dis- 
pense with  the  duty.  Taxes  of  this  kind  tend  to 
become  inoperative,  provided  always  that  the  latent 
resources  for  economical  production  really  exist. 

Some  years  ago  a  man  who  had  retire*  1  from  the 
business  of  making  spool  silk  remarked  that,  in  his 
judgment,  a  duty  of  three  per  cent  on  imported  silk  of 
this  kind  would  enaole  the  American  mills  to  hold  full 
possession  of  their  own  market.    The  difference  be- 
tween what  it  cost  the  foreigner  to  make  the  silk  and 
what  it  cost  the  American  to  make  it  was,  as  he 
thought,  not  over  three  per  cent.    If  he  was  right  in  his 
estimate,  almost  all  of  the  actual  duty  might  have 
been  abolished  without  crushing  the  American  manu- 
facturer.   Americans  had  developed  a  sufficient  apti- 
tude for  making  spool  silk  to  be  able  to  get  nearly  as 
much  of  it  by  turning  their  labor  in  that  direction  as 
they  could  by  turning  their  labor  in  any  other  direction 
and  exchanging  the  product  for  foreign  silk.     We  must 
originally  have  lost  much  by  forcing  ourselves  directly 
to  make  the  silk.  for.  at  the  outset,  u«  ponld  not  make 
it  as  economically  as  we  could  make  an  article  which 
we  could  exchange  for  it.    At  the  time  of  which  we 


i! 


524 


ESSENTIALS  OF   ECONOMIC  THEORY 


are  speaking  we  could  make  it  with  almost  no  waste, 
and  the  case  illustrates  a  general  fact  with  regard  to 
duties  upon  articles  in  the  making  of  which  we  are 
originally  at  a  disadvantage  but  are  afterward  at  no 
disadvantage  at  all.  When  our  original  disadvantage 
has  been  quite  overcome,  the  duty  becomes  inopera- 
tive. Whether  we  keep  it  or  throw  it  off  will  make  no 
difference  to  the  American  manufacturer  or  to  the 
American  consumer  —  provided  always  that  competi- 
tim  is  free  and  active.  If  it  is  not  so,  there  is  a  very 
different  story  to  tell. 

Importance  of  Changes  in  the  Relative  Productivity 
of  Different  Industries.  —  Instead  of  getting  from  the 
soil  gold  dust  to  barter  for  merchandise,  we  have  been 
getting  a  product  that  is  not  so  greatly  unlike  it.    For 
grains  of  gold  read  kernels  of  wheat,  and  the  statement 
will  tell  what  a  large  portion  of  our  country  has  pro- 
duced and  exported.    The   productivity   of   wheat 
raising  has  made  it  uneconomical,  in  certain  extensive 
regions,  to  engage  in  other  occupations;   but  as  the 
fertility  of  the  wheat  lands  has  declined,  and  as  the 
productive  power  of  labor  in  other  directions  has  in- 
creased, we  have  reached  a  point  at  which  it  is  just 
as  natural  to  make  things  for  which  we   formerly 
bartered  wheat  as  it  is  to  produce  the  grain  itself. 
The  decline  in  the  fertility  of    agricultural    lands 
and  the  increase  in  the  productive  power  of  labor  de- 
voted to  making  steel  appear  to  have  made  the  manu- 
facturer of  the  latter  article  as  independent  as  is  the 
raiser  of  cereals.    Originally  it  was  necessary  to  pro- 
tect iron  and  steel  industries  from  competition  in  or- 
der to  secure  the  establishment  of  them  at  an  early 
day.    Now  it  is  apparently  not  necessary  to  continue 
the  protection.    Labor  in  making  steel  will  give  us 


PROTECTION   AND  MONOPOLY 


525 


as  many  tons  of  it  in  a  year  as  the  same  labor  would 
give  us  if  spent  in  the  raising  of  wheat  to  be  exchanged 
for  foreign  steel.  The  duty  on  steel,  if  this  is  the  case, 
has  become  inoperative,  in  the  sense  that  it  no  longer 
acts  to  save  from  destruction  the  steel-making  indus- 
try. It  is  perniciously  operative  in  another  direction, 
for  it  is  an  essential  protector  of  a  quasi-monopoly  in 
the  industry;  and  this  illustrates  what  often  happens 
in  cases  in  which  the  infant  industry  argument  proves 
to  be  well  grounded.  The  argument  predicts  for  the 
newly  established  industry  a  great  future  develoj)- 
ment  and  a  time  of  ultimate  independence.  Protec- 
tion undertakes  to  nurse  it  through  its  period  of  help- 
lessness and  dependence  into  a  time  when  it  can  stand 
on  its  own  feet  and  maintain  itself  against  rivals.  If 
that  period  comes,  —  and  the  history  of  the  United 
States  shows  that  in  many  cases  it  has  come,  —  you 
can  throw  off  the  entire  duty,  if  you  will,  and,  unless 
the  price  of  the  article  has  been  artificially  sustained 
by  something  besides  the  duty,  our  manufacturers 
will  not  lose  possession  of  their  market. 

An  essential  condition  of  realizing  the  happy  pre- 
dictions of  the  protectionists  is  that  competition  among 
American  producers  should  be  unimpeded.  If  that 
were  so,  goods  would,  as  they  said,  be  sold,  in  the  end, 
at  prices  fixed  by  the  costs  of  production,  including 
the  normal  rate  of  interest  on  the  capital  employed. 
Manufacturers  may  originally  get  large  profits,  as  an 
offset  for  such  risks  as  they  take  in  doing  pioneer 
work;  but  afterward  they  will  get  interest  on  their 
capital  and  a  good  personal  return  for  directing  their 
business,  but  nothing  more.  If  they  sell  goods  at 
prices  which  yield  only  such  returns  as  this,  they  will, 
when  the  industry  is  on  its  feet,  sell  tLom  as  cheaply 


I 


-»i»ia,-T'^..##  1  '■  lil-^H^     'tr  ^^'TtJiaai'T 


526 


ESSENTIALS  OP  ECONOMIC  THEORY 


as  the  foreigner  would  do.  The  high  duty,  if  it  still 
continues,  may  make  it  doubly  difficult  for  the  for- 
eigner to  come  into  our  maricet ;  but  with  goods  selling 
at  natural  cost  or  cost  prices  he  would  not  come  into 
it  in  any  case,  and  the  duty  might  be  abolished  with 
entire  impunity. 

There  are,  indeed,  some  questions  which  arise  as 
to  occasional  unloading  of  extensive  stocks  in  foreign 
markets,  and  protection  has  been  called  for  to  prevent 
the  foreigner  from  making  America  his  "dumping 
ground."    This  process  works  in  both  ways:    the 
American  can  dump  his  surplus  products  into  foreign 
territory  as  well  as  the  foreigner  can  into  American 
territory.    Not  much  attention  need  be  paid  to  this 
particular  phase  of  the  subject.    Conservatism  will 
probably  suffice,  for  a  long  time,  to  retain  in  force  a 
somewhat  higher  duty  than  is  called  for  on  general 
grounds.    In  the  main  the  fact  is  as  stated:    if  the 
protected  infant  has  the  capacity  for  growth  that  was 
attributed  to  him  when  the  course  of  nursing,  coddling, 
training,  and  patient  waiting  was  entered  upon,  he 
will  announce  that  fact  after  a  term  of  years  by 
showing  his  inherent  strength  and  proving  that  these 
fostering  practices  are  no  longer  necessary.    They  are 
then  needed  only  to  aid  a  monopolistic  power  vrithin 

the  industry. 

The  Protection  of  ndustries  distinguished  from  the 
Protection  of  Monopolies.  — li  appears,  then,  that 
duties  have  two  distinct  functions.  One  is  to  protect 
from  foreign  competition  an  industry  as  such  — to 
aield  every  producer,  whether  he  is  working  inde- 
pendently or  in  a  pool  or  trust.  The  other  function 
is  to  protect  a  trust  in  the  industry  —  to  enable  a 
great  combination  working  within  the  limits  of  the 


PBOTECTION    AND   MONOPOLY 


527 


United  States  to  keep  that  great  field  to  itself  and  still 
charge  abnormally  high  prices  foi   its  products.    In 
fact,  a  distinguishable  part  of  a  duty  usually  performs 
the  former  of  these  functions,  and  another  distinguish- 
able part  performs  the  latter.     If  the  natural  price  of 
an  article  is  based  on  the  cost  of  making  it  in  the  United 
States,  and  if  that  is  twenty  per  cent  higher  than  the 
cost  in  a  foreign  country,  a  duty  of  twenty  per  cent 
will  place  the  American  product  and  the  foreign  prod- 
uct on  an  equality.    The  American  maker  will   not 
be  driven  from  his  market  until  he  begins  to  charge 
an  abnormally  high  price.    If  he  does  that,  the  for- 
eigner will  come  in.    Suppose,  then,  that  the  duty  is 
forty  per  cent.     Twenty  per  cent  may  be  needed  to 
enable  the  American  manufacturer  to  hold  his  own  as 
against  the  foreigner.     Provided  he  exacts  from  con- 
sumers of  his  goods  only  the  natural  returns  which 
business  yields,  year  in  and  year  out,  he  can  sell  all 
that  his  mills  produce   with    no  danger   that  the 
foreigner  will  supplant  him.    The  other  twenty  per 
cent  of  duty  enables  him  to  add  a  monopolistic  profit 
to   his  prices.      He  can  raise  them  by  about  that 
amount  above  what  is  natural  before  the  foreigner 
will  begin  to  make  him  trouble. 

We  have  seen  what  ways  the  trust  has  of  stifling 
competition  within  the  limits  of  our  own  country. 
There  are  the  favors  which  it  is  able  to  get  from  the 
railroads,  and  there  is  the  practice  of  selling  its  goods 
in  some  one  locality  at  a  cut-throat  rate  whenever  a 
competitor  appears  in  that  locality.  There  is  the  so- 
called  factors'  agreement,  which  often  forces  merchants 
to  buy  goods  of  a  certain  class  exclusively  from  the 
trust.  By  these  means  and  others  the  trust  makes  it 
perilous  to  build  a  mill  for  the  purpose  of  competing 


II 


528 


ESSENTIALS  OP   ECONOMIC  THEORY 


with  it.  If,  indeed,  it  makes  its  prices  very  high,  some 
bold  adventurer  will  build  such  a  mill  and  take  the 
chances  that  this  entails;  but  if  the  trust  stops  short 
of  offering  such  a  tempting  lure  in  the  way  of  high 
prices,  it  can  keep  the  field  to  itself.  If  the  extra 
duty  of  twenty  per  cent  —  the  unnecessary  portion 
of  the  whole  duty  of  forty  per  cent  —  did  not  exist, 
nothing  of  this  sort  would  be  possible.  The  trust 
would  have  to  sell  at  a  normal  price  in  order  to  keep 
out  the  foreigner,  and  so  wouUl  its  independent  com- 
petitor. Both  the  combination  and  its  rivals  could 
make  their  gomis  and  sell  them  in  security.  The 
industry,  as  such,  is  protected  by  the  duty  of  twenty 
per  cent,  and  it  is  the  additional  duty  which  is  the 
protector  of  monopoly  — the  enabling  cause  of  the 
grab  which  the  trust  can  make  from  the  pockets  of 
the  consuming  public. 

In  practice  one  would  not  try  to  make  the  figures 
quite  as  exact  as  is  implied  in  the  statement  that  just 
twenty  per  cent  of  duty  is  needed  to  protect  the  indus- 
try as  such  from  the  foreigner,  and  that  just  another 
twenty  per  cent  acts  as  a  maker  of  a  monopolistic 
price.    It  would  be  impracticable  to  fix  the  duty  in 
such  a  way  as  exactly  to  meet  the  nerd  of  protection. 
Owing  to  fluctuations  in  values,  the  duty  might  be 
made  s'ightly  higher  than  is  necessary  under  normal 
conditions.    All  these  things  would  have  to  be  con- 
sidered by  a  competent  tariff  commission.    The  figures 
we  here  use  are  illustrative  only ;  but  the  principle  is 
as  clear  as  anything  in  economics.    Protecting  an 
industry,  as  such,  is  one  thing;  it  means  that  Ameri- 
cans shall  be  enabled  to  hold  possession  of  their  mar- 
ket, provided  they  charge  prices  for  their  goods  which 
yield  a  fair  profit  only.    Protecting  a  monopoly  in 


PROTECTION    AND   MONOPOLY 


629 


the  industry  is  another  thing;  it  means  that  foreign 
competition  is  to  be  cut  off  even  when  the  American 
producer  charges  unnatural  prices.  It  means  that 
the  trust  shall  be  enabled  to  sell  a  portion  of  its  goods 
abroad  at  one  pric  and  the  remainder  at  home  at  a 
much  higher  price.  It  means  that  the  trust  is  to  be 
shielded  from  all  ompetition,  except  that  which  may 
come  from  audacious  rivals  at  home  who  are  willing 
to  brave  the  perils  of  entering  :he  American  field  pro- 
vided that  the  prices  which  here  rule  afford  profit 
enough  t-)  justify  the  risk. 

A  Limit  beyond  which  a  Duty  becomes  a  Supporter 
of  Monopolies.  —  This  line  of  cleavage  runs  through 
the  greater  part  of  the  duties  which  this  country 
now  imposes  on  foreign  articles;  and  the  fact  reveals 
the  scientific  rule  for  tariff  reduction.  Up  to  a  certain 
point,  according  to  the  traditional  American  v  ew, 
the  duty  may  do  good.  It  may  be  protecting  an  in- 
dustry that  is  not  quite  an  infant  and  yet  has  not 
grown  to  its  full  stature  nor  attained  to  its  full  com- 
peting power.  \Vhatev(>r  may  be  claimed  as  to  what 
ought  to  be  done  with  this  portion  of  the  duty,  there 
is  no  doubt  what  will  be  done;  it  will  be  retained,  and 
the  American  people  will  wait  with  such  patience  cs 
they  may  for  the  coming  of  the  time  when  the  indus- 
try will  be  independent  of  all  ^uch  aid.  Beyond  this 
point  a  protective  duty  becomes  a  trust  builder  par 
excellence. 

Most  Duties  Compounds  of  Good  and  Einl.  —  There 
are  some  industries  which  are  fully  matured.  The 
duties  which  were  imposed  to  shield  them  during  their 
infancy  are  no  longer  necessary  for  that  purpose'. 
The  amount  of  protection  that  in  these  cases  is  neces- 
sary to  keep  the  American  market  for  th(>  American 

2ii 


-^m: 


>^-. 


530 


E88ENTIAL8  OF   ECONOMIC  THEOKY 


product  is  nil.  The  sole  effect  of  duties  on  the  prod- 
ucts of  such  industries  is  to  encourage  monopoly. 
At  the  other  extreme  there  are  a  few  industries  which 
have  not  gravitated  into  the  control  of  monopolies 
and  which  nee<l  much  of  the  protection  that  they  have 
in  order  t-^  hold  their  present  fields.  If  they  really 
are  infants  and  not  dwarfs,  —  if  they  have  the  ca- 
pacity to  glow  to  full  itature  and  independence,  — 
the  policy  of  the  jieople  will  undoubtedly  be  to  let 
them  keep,  for  a  considerable  time,  all  the  protection 
that  they  now  enjoy.  The  number  of  such  industries 
as  this  is  comparatively  small.  In  the  case  of  the 
great  majority  of  our  duties  there  is  one  part  that 
protects  the  industry  as  such  and  another  part  that 
protects  the  monopoly  within  it.  Throw  off  the  whole 
tluty,  and  you  expose  the  independent  rivals  of  t'ue 
trust,  as  well  as  the  trust  itself,  to  a  foreign  competi- 
tion which  they  are  hardly  able  to  bear;  but  if  you 
throw  off  a  part  of  the  duty,—  the  part  which  serves 
to  create  the  mono-^oly,  —  you  do  not  destroy  and 
probably  do  not  hurt  the  independent  producer.  His 
position  now  is  abnormal  and  perilous.  He  may  be 
continuing  solely  by  grace  of  a  power  that  could  crush 
him  any  day  if  it  would,  and  its  power  to  crush  him  is 
due  to  the  great  gains  which  its  position  as  a  monopoly 
affords.  When  it  wishes  to  crush  a  local  rival,  it  can 
enter  his  territory  and,  within  that  area,  sell  goods 
for  less  than  it  costs  to  make  them;  and,  while 
pursuing  this  cut-throat  policy,  it  can  still  make 
money,  because  it  is  getting  high  prices  in  the  other 
parts  of  its  extensive  territory.  With  no  such  great 
general  returns  to  draw  on  as  a  war  fund,  the  trust 
would  have  to  compete  with  its  rivals  on  terms  which 
would  be  at  least  more  nearly  even  than  they  now 


H&$^2f4P^L;:  '^Ll^  i^2^i 


PROTECTION   AND   MONOPOLY 


531 


\' 


are.    It  would  still  have  weapons  which  it  could  em- 
ploy against  coiupctitors,  and  its  capacity  for  fighting 
unfairly  would  not  be  exhausted.     Without  further 
action  on  the  part  of  lawmakers  the  position  of  a 
small  rival  of  a  trust  niiKht  be  unnaturally  dangeroug- 
but  an  essential  point  is  thai  one  means  which  the 
trust  adopts  in  order  to    -ush  him  depends  on  the 
existence  of  ^^reat  p-         l<\ 
and  these  would  not  -  i  '  ,  'a 
sary  and  abnormal     ,it  -  •  tf  - 
The  trust  wan*     i    ,    ;v     > 
it.     It  is  the  pc  I  >i'       ,u  .,  ,. 
termed  "  standi  i      ft  '     n 
making  part  a(   '  ,  '.m    ;     ■ , 
which  that  part  binu-^  i      ,  ,, 
povverful,  as  we  do  no     -    i 

find  ways  of  thwarting  ta:...  .-. _  _  ,,  .,^.,  „,„^.^ 

anti-trust  legislation.    Drastic  laws  forced  through 
legislatures  or  Congress  during  ebullitions  of  popular 
wrath  —  laws  which  drmand  so  much  in  the  way  of 
trust  breaking  that  they  will  never  be  enforced  and 
never  ought  to  be  —  have  not,  thus  far,  been  pre- 
vented.   Such  "bulls  against  the  comet"  have  been 
issued   frequently    enough,    but   serious   legislation, 
based   on   sound   principles,   will   encounter  graver 
difliculties.    There  are  difficulties  before  ou,  people 
even  where  tl.ey  see  clearly  what  they  want  -nd  are 
trying  to  get  it ;  but  where  they  do  not  see  wuat  they 
want,  the  case  is  hopeless.     The  trust-making  part  of 
protective  duties  has  an  efTecc  about  which  there  is  no 
uncertainty,  and  if  the  American  people  discover  this 
fact,  they  will  not  have  reached  their  goal,  hut  the 
la:x)riou8  route  that  leads  to  it  will  at  kiist  lie  dis- 
tinctly before  them. 


most  of  its  territory; 
'   '•    it     »•  the unneccs- 

.1    If;. 

'       V   til    rhe  whole  of 

"*    »i(  ,>'  Jcy  which  is 

*ae  monopoly - 

uic  of  the  profits 

'  '   -s.     The  trust  is 

"  ("•  lold,  and  it  will 

-iuciion  as  it  does  other 


I 

■3 


m 


532 


^^, 


ESSENTIALS  OP  ECONOMIC  THEORY 


The  Policy  demanded  in  the  Interest  of  Progress.  — 
The  general  facts  which  have  here  been  cited  call  for 
the  abolition  of  a  certain  part  of  the  existing  duties 
and  the  retention  of  another  part,  and  they  make  the 
division  between  the  two  parts  clear  at  least  in  prin- 
ciple.   We  want  to  keep  one  part  of  a  duty  whenever 
it  protects  an  industry  which  is  not  yet  mature  but  is 
on  its  way  toward  maturity.    We  want  the  industry 
because  it  is  progressive  in  its  wealth-creating  power 
and  will,  one  day,  make  an  important  addition  to  our 
national  income.    It  is  a  dynamic  agent  —  a  factor 
in  the  progress  we  are  making  toward  the  unrealized 
goal  of  universal  comfort.    We  do  not  want  the  other 
part  of  the  duty,  first,  because  we  do  not  want 
monopoly.    Any   feature   of  our  industrial   system 
which  is  convicted  of  being  simply  a  monopoly-build- 
ing element  is  condemned  by  that  fact  to  extinction, 
if  the  power  of  the  people  suffices  to  destroy  it.    Does 
this  mean  that  the  consolidations  themselves  are  thus 
condemned?    Do  we  not  want  great  corporations 
with  vast  capitals?    Assuredly  we  want  them,  for 
the  sake  of  their  economy  and  of  their  capacity  for 
greater  economy.    With  the  element  of  monopoly 
taken  out  of  them,  they  will  become  dynamic  agents 
and  contributors  to  general  progress.    The  part  of 
the  protective  tariff  which  we  need  to  get  rid  of  is  the 
part  that  helps  decisively  to  put  the  element  of 
monopoly  into  them ;  and  in  that  connection  the  worst 
charge  that  has  to  be  brought  against  this  part  of 
the  duties  remains  to  be  stated. 

Protedicm  and  Progress.  —  Monopoly  acts  squarely 
against  the  continuance  of  that  v  ry  progress  which 
the  tariff  was  designed  to  create.  The  entire  defense 
of  protection  has  rested  on  the  dynamic  argument, 


.«'i 


■-•  ^>iteOi. 


PROTECTION    AND   MONOPOLY 


533 


and  the  sole  justification  of  the  tax  which  protection 
originally  imposed  is  the  fact  that  it  has  given  us  in- 
dustries which  have,  in  themselves,  the  power  to  be- 
come more  and  more  productive.    It  would  be  hard  to 
deny  that  much  of  this  increase  in  productive  power, 
which  the  originators  of  the  protective  system  antici- 
pated, has  been  practically  realized.    The  manufac- 
tures which  have  been  carried  through  a  period  of 
weakness  have  actually  developed  competing  strength. 
We  have  accjuired  the  power  to  make  things  far 
more  cheaply  than  any  one  could  formerly  make  them, 
and  the  cheapening  process  still  goes  on.    Our  manu- 
facturing centers  arc  alive  with  machinery,  much  of 
which  is  of  our  own  devising.    Thanks  to  the  progres- 
sive character  of  these  Industrie's,  the  waste  which 
attended  the  introduction  of  thorn  }a.s  Ix-en  largely 
atoned  for.     On  dynamic  grounds,  and  solely  on  those 
grounds,  has  the  policy  of  protection  fairly  well  vindi- 
cated itself.    And  now  we  have  come  to  the  point 
where  that  saving  element  in  the  protective  -ystem  is 
in  danger  of  vanishing.    Indeed,  the  excessive  part  of 
the  protective  tariff  now  acts  positively  to  check  the 
progress  that  it  once  initiated,  for  monopoly  is  hostile 
to  that  progress.     The  whole  force  of  the'  argument 
based  on  mechanical  invention  and  the  development 
of  latent  aptitudes  in  our  people  now  holds  as  against 
the  monopoly-buildiiij.  part  of  the  tariff.     Keep  that 
portion  of  a  duty  which  is  not  needed  to  suve  an  in- 
dependent producer  from  foreign  conii)etiti()n,  which  is 
needed  only  to  enable  the  trust  to  diarge  an  &'.  lormal 
price  and  still  keep  the  foreigner  out  of  our  markets, 
and  you  build  up  a  monopoly  which  is  unfavorable 
to  continued  improvement  in  the  productive  arts. 
Competition  is  the  assured  guarantee  of  all  such 


I   I 


534  ESSENTIALS  OF  ECONOMIC  THEORY 

progress.    It  causes  a  race  of  improvement  in  which 
eager  rivals  strive  with  each  other  to  see  who  can  get 
the  best  result  from  a  day's  labor.    Ii  put.3  the  pro- 
ducer  where  he  must  be  enterprising  or  drop  out  of  the 
race     He  must  invent  machines  and  processes,  or 
adopt  them  as  others  discover  them.    He  must  or- 
ganize, explore  markets,  and  study  consumers  wants. 
He  must  keep  abreast  of  a  rapidly  moving  procession 
if  he  expects  to  continue  long  to  be  a  producer  at  all. 
The  Effect  m  Progress  of  Consolidation  mthout  Mo- 
nopoly. -  Does  a  monopoly  live  under  any  such  for- 
ward pressure?    Certainly  not.    It  may  make  some 
improvements,  for  it  can  gain  w(>alth  by  so  domg; 
but  it  is  not  forced  to  make  them  or  perish.     Here  we 
encounter  a  wi.lr  distinction  that  is  in  danger  of  bemg 
overlooked.     A  vast  corporation  that  is  not  a  true 
monopoly  may  be  eminently  progressive.     If  it  still 
has  to  fear  rirr.'s,  actual  or  potential,  it  is  under  the 
same  kind  of  pressure  that  acts  upon  the  independent 
lucer  -  pressure   to   economize   lal)or.     It   may 
be  able  to  make  even  greater  progress  than  a  smaller 
corporation  could  make,  for  it  may  be  able  to  hire 
ingenious  men  to  devise  new  appliances,  and  it  may  be, 
able  to  test  them  without  greatly  trenching  on  its  in- 
come by  such  experiments.     When  it  gets  a  successful 
machine,  it  may  introduce  it  at  once  into  many  mills. 
Consolidation  without  monopoly  is  favorable  to  prog- 
ress    With  the  element  of  nioiuM^'ly  infused  into  it, 
a  great  consoli.lation  frees  itsrlf  from  the  necessity 
for  progress,  an<l  both  cxpi-rience  and  a  prum  reascm- 
ing  are  against  the  conclusion  that,  under  such  a  re- 
gime,   actual    progress    will    be   rapi<l.    The   secure 
mono,H,lv  may  stagnate  with  impunity,  and  the  rea- 
son why  many  .-orporations  which  have  looked  like 


PROTECTION    AND   MONOPOLY 


535 


monopolies  have  not  actually  stagnated  is  that  their 
positions  have  not  been  thus  secure.    They  have  had 
some  actual  rivals  and  many  potential  ones.    The 
part  of  the  protective  system  which  tends  to  make 
them  more  secure  in  their  monopnlit^tic  position  strikes 
at  the  most  vital  part  of  the  industrial  system,  the 
progress  within  it,  the  element  which  adds  daily  to 
man's  power  to  create  weahli  and  enables  the  world 
to  sustain  an  increasing  population  in  an  increasing 
degree  of  comfort.    True  monopoly  means  stagnat ion, 
oppression,  and  what  has  been  called  a  new  feudalism, 
while  consolidation  without  monc)i.H)ly  means  progress' 
freedom,  and  a  constant  approach  to  industrial  de- 
mocracy.    One  of  the  essential  means  of  securing  this 
latter  result  is  the  retention  of  so  much  protcTtion  as 
is  needed  to  keep  American  ingenuity  and  organizing 
power  alive  and  active,  while  abolishingtlmt  exc(>ss  of  it 
which  fosters  monopoly  and  does  away  with  tlie  neces- 
sity for  exercising  these  traits.     There  will  jje  dis- 
agr'-cment  as  to  the  point  at  which  the  dividing  line 
should,  in  particular  cases,  be  drawn;    a  protected 
interest  will  claim  a  duty  of  fifty  per  cent  where 
twenty  would  amply  suffice  and  where  every  excess 
above  this  would  be  pernicious.     There  should,  how- 
ever, be  no  serious  disagreement  as  to  what  we  want  — 
progress  and  the  repression  of  monopoly  which  bars 
progress;   and  there  should  be  little  disagreement  as 
to  the  principle  to  be  followed  in  making  a  protective 
system  contribute  to  these  ends.     It  must  assuredly 
not  bar  out  the  foreigiKT  when  the  American  trust 
has  put  its  prices  at  an  extortionate  level  and  is  using 
its  power  to  crush  all  rivalry  at  home.     The  good 
effect  and  the  evil  effect  of  an  excessive  duty  are  (luite 
distinct  in  principle,  and  the  task  that  is  before  us  is 


536       ESSENTIALS  OP  ECONOMIC  THEORY 

to  make  them  so  in  practice.    It  is  to  abolish  the 
monopoly-builiiing  part  of  the  protective  system. 

The  whole  question  of  the  relation  of  the  tariff  to 
monopoly  presents  debatable  points,  some  of  which 
cannot  here  be  discussed.    It  is  by  no  means  claimed 
that  an  unnaturally  high  tariff  is  the  sole  means  of  sus- 
taining monopolies,  or  that  the  reduction  of  it  would 
leave  nothing  more  to  b(^  done.     A  great  corporation, 
as  has  already  been  said,  possesses  special  means  of 
waging  a  predatory  war  against  local  rivals,  and  its 
monopolistic  power  depends  on  these  as  well  as  on  the 
tariff.     With  the  foreigner  forced  off  the  field  the  trust 
can  use  with  terrible  effect  these  means  of  attack 
on  local  rivals.     It  is  true,  as  we  have  seen,  that  its 
monopolistic  power  might  be  greatly  reduced,  without 
touching  the  tariff,  by  taking  from  it  its  command  of 
freight  rates  and  thus  destroying  its  power  to  undersell 
rivals  by  means  of  the  special  rebates  which  it  now 
receives ;  and  its  power  for  evil  might  be  reduced  still 
more  by  taking  from  it  its  privilege  of  cutting  prices 
on  its  own  goods  in  one  locality  while  charging  else- 
where the  high  prices  which  the  exclusion  of  the  for- 
eigner enables  it  to  get.     Regulating  trusts  by  these 
means  only  and  without  any  change  in  the  protective 
system  would  require,  on  the  part  of  the  people,  a  long 
and  hard  struggle.     It  would  require  heroic  ix-rsist- 
ence  in  a  course  of  difficult  administration.     Success 
will  come  more  quickly  and  easily  if,  while  keeping  a 
normal  amount  of  protection,  we  abolish  the  ab- 
normal part  of  it.    The  other  measures  for  controlling 
trusts  harmonize  with  this  one  and  will  work  more 
effectively  if  they  are  used  in  combination  with  i^   To- 
gether with  this  one  they  remove  a  barrier  against 
progress  and  set  in  action  a  force  that  promotes  it. 


PROTECTION   AND   MONOPOLT  537 

Without  going  into  any  intricacies  one  can  sor  that 
with  the  tanflf  at  a  normal  level,  the  success  of  the  trust 
in  making  money  will  depend  on  its  efficiency  ^  a  pro- 
ducer; and  the  same  will  be  true  of  its  independent 
rivals.    Again  and  again  it  will  then  happen  that 
new  rivals  will  appear,  whose  mills  are  far  more  effi- 
cient than  many  which  the  trust  operates.    They 
may  even  be  more  eflicient  than  the  best  of  the  mills 
of  the  great  combination.    American  producers  and 
foreigners  will  be  in  eager  rivalry  with  each  other  in 
seekmg  out  means  of  reducing  costs  or  —  what  is  the 
same  thing  —  increasing  the  product  of  a  day's  labor 
Under  the  conditions  here  supposed,  the  trust  will 
not  be  able  to  exterminate  a  really  efficient  competitor 
and  It  will  feel  the  stimulus  of  his  rivalry  in  a  way 
that  will  force  it  to  be  alert  and  enterprising  in  seek- 
ing and  using  new  devices  for  economical  production. 
The  trust  and  its  American  competitor  will  alike  feel 
the  stimulus  of  the  foreigner  s  efforts  to  surpa.ss  them 
both  m  methods  of  efficient  production :   and  the  out- 
come of  it  all  will  be  a  greater  degree  of  progress  —  a 
more  dynamic  industrial  world  -  than  there  is  any 
hope  of  realizing  while  foreigners  are  excluded  from 
our  markets  even  when  prices  are  there  extortionate 
Prices  will  be  extortionate  so  long  as  the  trusts  are 
checked  only  by  l„cal  rivals  and  are  allowed  W)  dui, 
these  rivals  into  suhmissivencss.     Keeping  the  for- 
eigner away  by  competing  fairly  with  him  is  what  we 
should  desire;   but  barring  him   forcibly  out,  even 
when  prices  mount  to  extravagant  levels,  helps  to 
fasten  on  this  country  the  various  evils  which  are 
included  under  the  ill-omened  term  mmwpoh,:  and 
among  the   worst   of   these  evils  are   a   weakening 
of  dynamic  energy  and  a  reduction  of  progress. 


CHAPTER  XXIX 

LEADING   FACTS   CONCERNING   MONEY 

Dynamic  Qmlilies  of  Money.  —  The  question  con- 
cerning money  which,  for  the  purposes  of  the  present 
treatise,  it  is  most  important  to  answer  is  whether 
general  prosperity  can  be  increased  or  impaired  by 
manipulating  the  volume  of  it.  Is  money  a  dynamic 
agent,  and  can  it  be  so  regulated  as  to  induce  economic 
progress?    Tln'se  ([uestions  require  careful  answers. 

Accepted  Facts  concerning  Money.  —  We  may  ac- 
cept without  argument  the  conclusion  that  both  theory 
and  ex|)erience  have  reached  concerning  the  superi- 
ority of  gold  and  silver  over  other  materials  of  which 
a  currency  can  l)e  made.    They  possess  the  univer- 
sally recognized  utility  which  makes  them  everywhere 
in  demand.    They  have  the  "imperishability,"  the 
"  portability,"  and  the"  divisibility  "  which  are  needed, 
and  when  maile  into  coins,  they  have  the  "cogniza- 
bility"  by  which  they  can,  more  readily  than  many 
other  things,  l)e  iilentified  and  distinguished  from 
cheap  imitations.    There  remain  to  be  settled  the 
questions  whether  an  expanding  volume  of  currency 
is  necessary  for  prosperity,  and  whether  the  expan- 
sion can  Ix'tter  Ix'  secured  by  using  two  metals  than  it 
can  by  using  one. 

Effectfi  of  Free  Coinage.  —  It  is  (^vident  that  when  a 
government  coins  without  charge  all  the  gold  and  silver 
that  are  brought  to  it  for  that  purpose,  either  ntctal 
will  1k'  worth  about  as  iimch  in  the  form  of  bullion  as 

638 


it*^ 


LEADING    FACTS    CONCERNING    MONEY  539 

it  is  in  the  form  of  coin.    If,  for  uses  in  the  arts,  an 
ounce  of  gold  is  worth  more  than  the  number  of  dollars 
that  can  be  made  of  it,  the  coining  of  this  metal  will 
temporarily  cease  and  some  coins  already  made  will 
be  melted.     Moreover,  where  both  of  the  precious 
metals  are  used  as  money,  neither  of  them  can  long 
be  worth  m  a  coin  much  more  than  is  the  bullion  con- 
tamed  in  the  less  valuable  of  the  two.    If  a  gold  dollar 
will  buy  more  silver  than  is  needed  to  make  a  silver 
dollar,  because  of  the  higher  value  of  the  bullion  in  the 
former  coin,  silver  will  Ix-  Ixjught  and  taken  to  the 
mint  for  coinage,  while  gold  dollars  will   Im-  melted 
The  gold  will  go  farther  in  the  way  of  paying  debts 
when  It  IS  m  this  way  exchanged  for  silver  money. 

The  Effects  of  Inflation  of  Currency  m  Prices.  — 
We  are  citing  a  further  accepted  fact  when  we  say 
that,  other  things  being  equal,  enlarging  the  volume  of 
currency  in  use  raises  the  prices  of  goods.    By  what 
particular    mechanism    this    is    brought    about    we 
do  not  here  inquire.     Not  everything  that  is  claimed 
under  the  head  of  a  "(juantity  theory  of  money"  is 
generally  believed,  but  there  will  he  little  disposition 
anywhere  to  deny  that,  if  no  other  dvnamic  niovet.ient 
should  take  place,  ad.ling  fifty  per  cent  to  the  volume 
of  metallic  money  in  circulation  would  make  prices 
higher  than  they  were  bi^fore  the  addition. 

Rising  Prices  and  Business  Profits.  —  If  „p  assert, 
further,  that  permanently  risiiiir  ,,ri,.,.s  irKvin  pros- 
perity, profits  forth.'  entrepreneur  and  a  brisk  de- 
mand for  labor  and  capital,  uc  ass(  rt  what,  in  the 
practical  worM.  is  too  generally  accept.'d.  Soimd 
theory  and  current  belief  are  at  variance  on  this  pcmit. 
and  the  current  opinion  appears  at  first  glancr  to  liave 
the  facts  on  its  side.     Periods  of  rising  prices  liMve 


I 


540 


ESSENTIALS  OF  ECONOMIC  THEORY 


actually  been  periods  of  prosperity.    It  is  considonvl 
hard  for  cither  a  merchant  or  a  manufacturer  "to  do 
business  on  a  falling  market,"  and  easy  to  make 
money  on  a  rising  one.    This  impression  is  entirely 
correct  in  so  far  as  it  concerns  those  fluctuations  of 
price  which  occur  suddenly  and  continue  only  briefly. 
What  it  is  of  great  importance  to  know  is  whether  a 
Bteadyriseof  prices  whichshould  continue  permanently 
would  mean  permanent  profits  for  the  entrepreneur; 
and  it  can  be  asserted  without  hesitation  that  it  would 
not  do  so  if  the  final  productivity  theory  of  interest 
is  sound,  that  is,  if  capital  commands  in  the  market 
a  rate  of  interest  which  corrc>sponds  to  the  amount  that 
the  marginal  increment  of  it  will  actually  produce. 

The  Rate  of  ExjHinsion  of  Currenn^   distinguished 
from  (he  Ahf^olute  Amount  of  Increase.  —  The  extent 
to  which  any  currency  is  capable  of  raising  prices  by 
a  continued  expansion  depends,  not  on  the  al»olute 
amount  of  that  expansion,  but  on  the  percentage  of 
enlargement  that  takes  place  within  a  given  time. 
Moreover,  a  given  percentage  of  increa.se  per  annum 
may  be  maintained  as  well  by  one  metal  as  by  two. 
If  the  gold  and  the  silver  money  of  the  woHd  were  each 
increased  by  one  per  cent  a  year,  prices  would  have  the 
same  trend  under  a  currency  made  of  one  metal  as 
un<lor  a  curr-ncy  made  of  both.     If,  on  the  other  han<l 
all  the  currencies  were  base<l  on  gold  only,  a  change 
to  a  binietivllic  system  would  at  once  make  a  single 
great  enlargement  of  the  volume  of  mon(>y;  but  after 
this  th(>  rate  of  enlargement  would  Im'  no  greater  than 
it  was  uii.ler  the  single  standard.     In  the  tramitwn 
from  a  gold  to  a  bimetallic  currency,  wc  should  get 
rapidly  ri  Mig  prices:  after  the  change  ha<l  been  com- 
pleted", w(    iiould  have  a  currency  expanding  as  before 


LEADING   FACTS   CONCERNING   MONEY  541 

at  the  one  per  cent  rate.     If  the  volume  of  business 
were  to  increase  at  the  rate  of  two  per  cent  a  year 
while  other  influences  affecting  prices  were  to  remain' 
unchanged,  the  currency  would  not  expand  as  rapidly 
as  the  demand  for  it,  and  prit.«s  would  not  only  fall 
but  would  fall  at  the  same  rate  a^  if  only  o'.e  metal 
had  been  used.     I'se  ten  metals  instead  of  two  - 
make  coins  of  tin,  platinum,  copper,  nickel,  etc.,  -  an.l 
If  the  grand  comixjsitc  still  insures  the  one  jrt  cent 
rate  of  general  iiKrea.se  of  metallic  money,  prices  will 
vary  as  they  would  have  varied  with  a  currency  of  gold 
alone.    VV  holly  transitional,  under  such  circumstances 
IS  the  rise  in  prices  secured  by  the  a<loption  of  bimetal- 
lism.    It  IS  gained  by  adding  to  the  stock  of  g„ld  now 
used  for  ultimate  payments  an  existing  stock  of  silver 
Why  Metallic  Currency  of  Any  Kind  gains,  in  the 
Long  Run,  m  Purchasing  Power.  —  In  the  long  run 
almost  any  metallic  coin  of  a  fixed  weight  will  gain  in 
Its  purchasing  power.     Silver  would  do  this  as  well  as 
gold;  and  so  would  a  composite  coinage  made  of  ten 
metals.    The  law  of  diminishing  returns  applies  to 
mining  as  well  as  to  agriculture.    The  more  silver 
you  want,  the  deeper  you  must  dig  for  it,  and  the  more 
refractory  ores  you  must  smelt.    The  transnmting  of  a 
raw  metal  into  finished  articles  becomes  a  cheaper 
and  cheaper  process;   but  the  extracting  of  the  metal 
Itself  becomes  dearer.    A  larger  and  larger  fraction  of 
the  labor  that  is  spent  in  making  wares  of  silver,  of 
gold,  of  copjKT,  or  of  tin  must  be  spent  in  getting  the 
crude  material  out  of  the  earth.    There  are  improve- 
ments in  mining,  as  there  are  in  other  indu.stries,  and 
there  are  large  improvements  in  smelting;  hut  in's|)itr 
of  this  the  continual  working  of  more  diffieult  mines 
and  of  more  difficult  ores  makes  the  getting  of  the  cru.le 


u 


542 


ESSENTIALS  OF   ECX3N0MIC  THEORY 


material,  in  the  long  run,  relatively  costly.  Since  a 
coin  consists  chiefly  of  raw  metal,  we  may  therefore 
count  on  having  before  us  a  regime  of  falling  prices 
whatever  uK'tallic  currency  we  adopt.  The  rate  of 
the  fall  an.!  the  degree  of  steadiness  in  it  will  be 
greater  with  some  metals  than  with  others.  The 
variations  in  the  value  of  gold  are,  on  the  whole, 
comparatively  steady.  This  metal  fluctuates  in 
amount  and  in  cost,  but  the  changes  ar(>  less  sudden 
than  in  the  case  of  most  others. 

The  Steadiiiess  of  t)ie  Change  in  the  Purchasing  Power 
of  Money  the  ImjHrriant  Fact.  — A  second  fact  to  be 
noted  is  that  the  Ix'st  currency  is  one  the  purchasing 
power  of  which  shall  change,  if  at  all,  at  a  compara- 
tively uniform  rate.     This  fact  is  of  paramount  conse- 
(juence,  and  tlic  veritication  of  it  will  repay  any  amount 
of  study.     It  is  not  the  rapidity  with  which  gold  gains 
in  purchasing  i>owor,  but  the  steadiness  of  the  gain 
from  year  to  year  that  determines  whether  it  is  the 
best  money  that  can  be  had  by  the  business  world. 
A  change  in  the  rate  of  increase  in  the  purchasing  power 
of  the  coinage  metal  has  a  really  disturbing  effect; 
a  steady  and  calculable  appreciation  does  not.    There 
exists  in  some  acute  minds  what  I  venture  tc  call  a 
delusion  about  the  effect  on  business  classes  of  an  ad- 
vance in  the  purchasing  power  of  gold  that  proceeds 
for  a  long  time  at  a  uniform  rate.     Conceding  the 
prosjK'ct  of  a  decided  gain  in  the  value  of  this  metal, 
we  may  denv  absolutely  that,  if  it  is  steady,  it  plays 
into  the  hands  of  creditors,  burdens  the  entrejyreneur, 
blights  enterprise,  or  has  any  of  the  .-ffects  that  cer- 
tain men  whom  we  are  rK)und  to  respect  have  claimed 
for  it      Irregular  changes  of  value  would,  indeed,  pro- 
duc(>  these  results.     Let  gold  gain  three  per  cent  in 


LEADING    FACTS   CONCERNING    MONEY  543 

value  this  year,  one  per  cent  next  year,  and  four  per 
cent  m  the  year  following,  and  injurious  things  will 
happen;  but  let  it  gain  even  as  n.uch  as  three  rx;r 
cent  each  year  for  a  century,  and  at  the  test  points  in 
business  life  there  will  ensue  the  essential  effects  that 
wodd  have  followed  if  it  had  not  gained  at  all. 

This  means  that  with  a  steadily  apprtviating  cur- 
rency the  things  will  happen  that  make  for  proe^-rity. 
The  debtor  will  get  justice,  (.nterprise  will  be  safe 
and  wages  will  gain  while  industry  gains.    The  entr^ 
preneuT,  ,n  whose  behalf  bad  counsel  has  lately  bcH^n 
given,  will  best  do  his  strategic  work,  not  with  that 
currency  which  varies  in  value  the  h-a-st.  but  with  that 
which  vanes  most  uniformly.     If  it  apix-ars  that  gold 
IS  likely  to  appreciate  more  than  silver,  and  to  appre- 
ciate  more  .steadily,  it  is  decidedly  the  bc-tter  nietal. 
It  IS  not  mHation  on  which  the  entrepreneur  .ht- 
manently  thrives,  nor  is  it  contraction  through  which 
m  the  long  run,  he  .suffers ;  it  is  changes  in  the  rate  of 
inflation  or  of  contraction  that  produce  marked  and 
damaging  effects  at  the  critical  ,,oints  of  business  life 
Loan  Interest  as  related  to  the  Increase  of  Real  Capi- 
ta/.  -  How  does  a  slow  and  steady  appreciation  of  any 
metallic   currency  affect   the   relations   of   business 
classes?     Does  it  rob  borrowers  and  enrich  lenders^ 
Does  It  favor  the  consumers  by  giving  falling  prices' 
and  hurt  producers  in  the  same  degree?    Does  it  tax 
enterprise  and  paralyze  the  nerves  of  business  '    The 
answer  is  an  en.phatic  No.    Steadiness  in  the  rate  of 
appreciation  of  money  is  th(.  salvation  of  business 
^ot  by  one  iota  can  such  a  slow  and  steady  move- 
ment, m  Itself  alone,  rob  the  l)orrowing  class.     This 
is  a  sweeping  claim;  let  us  examine  it. 
It  has  been  shown  that  true  interest  is  governed  by 


.jicSi^ 


MICROCOPY   RESOLUTION   'cST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


1.0 


1.25 


Lii  1 2.8 


13^ 

|40 


23 
2.2 

2£ 
1.8 


^  APPLIED  IIVMGE     Inc 

^^  1653  Eost   Uair   Slreel 

S^S  Rochester,    New   York        14609       USA 

'-as  (716)   482  -  0300  -  Phone 

^^  (716)   288  -  5989  -  Fa« 


544  ESSENTIALS  OF  ECONOMIC  THEORY 

the  marginal  productivity  of  capital.  As  the  utUity 
of  the  final  increment  of  a  commodity  fixes  the  price 
that  a  seller  can  get  for  his  whole  supply,  so  the  produc- 
tive powerof  thefinal  unitof  capital  expresses  what  the 
owner  of  capital  can  get  by  lending  his  entire  supply. 
This  earning  capacity  expresses  itself  in  a  percentage 
of  the  capital  itself.  If  the  final  unit  can  create  a 
twentieth  of  itself  in  a  year,  any  unit  can  get  for  its 
owner  about  that  amount. 

In  assuming  that  capital  earns  a  twentieth  of  itself 
in  a  year,  we  may  use  a  commodity  standard  of  meas- 
urement.   A  grocer's  capital  of  twenty  barrels  of  su- 
gar may  become  twenty-one  barrels,  and  his  Hour 
and  his  tea  increase  in  a  like  proportion.    In  the  sim- 
plest illustration  that  could  be  given  of  a  capital  earn- 
ing five  per  cent  a  year,  we  should  assume  that  each 
kind  of  productive  instrument  in  a  man's  possession 
increases   in   quantity,   during   the   year,   by   that 
amount.    If  he  be  a  manufacturer,  his  mill  becomes 
a  hundred  and  five  feet  long,  instead  of  a  hundred  feet. 
It  contains  twenty-one  sets  of  woolen  machinery, 
instead  of  twenty.    The  flow  of  water  that  furnishes 
power    becomes  by    five    per    cent    more    copious; 
and  the  stock  of  goods,  raw,  unfinished,  and  finished, 
becomes  larger  by  the  same  amount. 

Of  course,  such  a  symmetrical  enlargement  of  all 
kinds  of  goods  could  never  actually  take  place  for 
some  things  increase  in  quantity  more  than  others^ 
The  illustration  shows,  however,  what  fixes  the  rate  ot 
interest :  it  is  the  self-increasing  power  of  a  miscellany 
of  real  capital.  If  the  mill,  the  machinery,  the  stock, 
grow  in  quantity  at  the  five  per  cent  rate,  that  is  the 
natural  rate  of  interest  on  loans  of  real  capital.^^  Ihc 
lender  gives  to  the  borrower  twenty  units  of     com- 


mi*^i9^' 


LEADING   FACTS   CONCERNING   R'ONET  545 

modity"  and  gets   back  twenty-one.     If  marginal 
social  capital,  consisting  of  commodity  and  measured 
in  some  way  in  units  of  kind,  has  the  power  to  add  to 
itself  in  a  year  one  unit  for  every  twenty,  lenders  will 
claim  about  that  amount,  and  borrowers  will  pay  it. 
How  the  Increase  of  a  Miscellany  0}  Goods  has  to  be 
Computed.  —  How  does  the  real  earning  capacity  of 
capital  in  concrete  forms  reveal  itself  ?    How  does  the 
grocer  know  that  he  can  make  five  per  cent  with  the 
final  unit  of  capital  that  he  borrows?    Not  by  the 
fact  that  each  lot  of  twenty  barrels  of  sugar  gains  one 
barrel,  that  each  lot  of  twenty  pounds  of  tea  gains  one 
pound,  and  so  on.    If  there  were  to  be  such  a  sym- 
metrical all-around  increase  in  the  commodities  in 
the  man's  possession,  his  shelves,  counters,  bins,  tanks, 
would  have  to  enlarge  themselves  in  the  same  ratio.' 
In  the  case  of  a  manufacturer  the  mill  would  have  to 
elongate  itself  by  one  foot  for  every  twenty,  as  in  the 
foregoing  illustration,  and  the  machinery  and  all  the 
stock  would  have  to  grow  in  the  same  proportion. 
The  land  and  the  water  power  would  have  to  enlarge 
themselves  by  the  same  constant  fraction. 

Of  course,  such  a  thing  does  not  take  place.  The 
general  amount  of  capital  goods  of  every  kind  enlarges ; 
but  the  enlargement  is  in  practice  computed  in  mone- 
tary value,  and  in  no  other  way.  The  whole  outfit 
becomes  worth  more  than  it  was.  The  increase  in 
monetary  value  gauges  the  claims  of  the  capitalist. 
If  the  stock  of  goods  has  grown  generally  larger,  and 
if  prices  have  fallen,  the  claim  of  the  capitalist  will 
fall  short  of  equaling  the  actual  increase  of  the  mer- 
chandise. 

The  increase  in  goods  of  different  kinds  is,  of  course, 
unsymmetrical.    If  the  man  is  a  manufacturer,  his 

2n 


iM^MjSk 


546 


ESSENTIALS  OF  ECONOMIC  THEORY 


mill  and  his  water  power  have  probably  not  increased. 
He  may  have  some  more  machinery,  and  he  has  more 
raw  materials  and  more  goods,  finished  or  unfinished, 
than  he  had  when  he  took  his  last  inventory.  If  he 
has  not  more  goods  of  these  kinds,  he  has  somethmg 
that  represents  them;  and  the  effect  on  his  fortunes 
is  as  if  the  mill  had  stretched  itself,  and  as  if  the 
machines  and  other  capital  had  multiplied,  all  m  the 

same  ratio. 

The  man  figures  his  gains  in  real  wealth  by  the  use 
of  money.    At  the  end  of  the  year  he  makes  a  list  of 
all  his  goods,  attaches  prices  to  them,  and  sees  what 
the  value  of  the  stock  has  become  by  the  year's 
business.    He  compares  the  total  value  in  money 
of  the  goods  on  hand  in  January,  1907,  with  that  of  the 
stock  of  January,  1906.    If  he  has  bought  and  sold 
for  cash  only,  and  if  during  the  year  he  has  drawn  for 
his  maintenance  only  what  he  has  earned  by  labor, 
the  excess  of  value  on  hand  at  the  beginnmg  of  the 
year  1907  informs  him  what  his  capital  has  earned 
during  the  preceding  twelve  months. 

The  Effect  of  Changes  of  Price  on  the  Chims  of 
Capitalists.  ~li    prices  have  remained  stable,  the 
earnings  of  the  capital  as  expressed  in  money  will 
accurately  correspond  with  the  earnings  as  computed 
in  commodity.    It  is  as  if  the  five  per  cent  increase  o 
the  sugar  and  the  flour  of  our  first  illustration,  or  of 
the  mill  and  the  machinery  of  the  second,  had  taken 
place.    It  could  then,  by  a  sale,  be  converted  into  a 
five  per  cent  increase  in  money.    By  selling  the  stock 
at  its  market  value  the  merchant  could  realize  five  per 
cent  more  than  the  original  stock  cost  him. 

If  money  has  gained  one  per  cent  in  its  purchasing 
powT,  or  if  prices  at  the  end  of  the  year  arc  by  so 


*^>a^: 


LEADING   FACTS   CONCERNING   MONEY  547 

much  lower,  the  inventory  will  show,  in  terms  of 
money,  only  a  four  per  cent  gain.  Now,  the  real 
increase  of  concrete  capital  is  still  five  per  cent,  and 
that,  by  the  law  of  interest,  is  what  the  capitalist  can 
claim  m  commodities.  This  claim  is  met  by  an  actual 
payment  in  money  of  four  per  cent.  Give  to  the 
capitalist,  in  January,  1896,  a  dollar  and  four  cents 
for  every  dollar  he  has  loaned  in  January,  1895,  and 
you  eaable  him  to  command  a  hundred  and  five  units 
of  commodity  for  every  one  hundred  that  he  com- 
manded at  the  earlier  date.»  You  give  him  by  a  re- 
duced monetary  payment  what  is  equivalent  to  the 
real  increase  of  capital. 

Practical  Differences  between  Real  Interest  and  the 
Increase  of  Real  Capital  —  It  is  the  increase  of  capital 
in  kind  that  fixes  the  rate  of  loan  interest.    Care 
must  be  taken  not  to  claim  for  this  part  of  the  adjust- 
ment any  unerring  accuracy;  for  the  marginal  pro- 
ductivity law  does  not  work  without  friction.     With 
real  capital  creating  five  and  a  half  per  cent,  the  lender 
might  get  only  five.    When,  however,  the  play  of 
forces  that  fixes  real  interest  has  had  its  way  and  has 
determined  that,  in  commodity,  capital  shall  secure 
for  its  owners  five  per  cent  a  year,  that  amount  is  . 
unerringly  conveyed  to  th(>m  by  the  monetary  pay-  ' 
ments  that  follow.    If,  by  paying  four  per  cent  as 
interest,  the  merchant,  in  the  illustrative  case,  makes 
over  to  the  lender  of  capital  that  part  of  the  increase 
of  goods  that  by  the  law  of  interest  falls  to  him,  four 

'  There  is  a  slight  compounding  here  to  be  taken  into  account. 
If  commodity  has  gained  five  pe-  cent,  while  prices  have  lost 
one  per  cent,  the  capital  as  measured  in  money  has  increased 
by  three  and  ninety-five  one-hundredths  per  cent  instead  of 
exactly  four. 


548 


ESSENTIALS  OP  ECONOMIC  THEORY 


per  cent  is  the  rate  that  the  loan  in  money  will  bring. 
This  is  on  the  supposition  that  the  change  in  the  pur- 
chasing power  of  money  is  perfectly  steady.  If  it  is 
unsteady,  effects  will  follow  that  are  of  much  conse- 
quence. 

Changes  in  the  purchasing  power  of  a  currency  pro- 
duce an  tifect  on  the  rate  of  interest  on  loans  of 
"money."    If,  with  a  currency  of  perfectly  stable 
value,  the  interest  on  loans  is  five  per  cent,  correspond- 
ing to  the  earnings  of  real  capital,  then  a  gain  in  the 
purchasing  power  of  the  currency  of  one  per  cent  a  year 
has  the  effect  of  reducing  nominal  interest  practically 
to  four  per  cent.    The  debtor  then  really  pays  and  the 
creditor  really  gets  the  same  percentage  as  before  of 
the  actual  capital  loaned.    The  borrower,  the  entre- 
preneur in  the  case,  finds  at  the  end  of  the  year  that 
he  has  more  commodities  by  five  one-hundredths 
than  he  had.    He  must  pay  the  equivalent  of  this  to 
the  lender.    With  money  of  stable  purchasing  power 
it  takes  five  new  dollars  for  every  hundred  to  do  it ; 
but  with  money  that  gains  in  its  power  to  buy  goods 
at  the  rate  of  one  per  cent  a  year  it  takes  only  four. 
.  The  rate  of  interest  on  loans  is,  in  the  long  run,  re- 
duced by  an  amount  that  accurately  corresponds  with 
the  appreciation  of  the  monetary  metal  wherever  the 
appreciation  is  steady.    This  law  works  with  a  pre- 
cision that  is  unusual  in  the  case  of  economic  laws. 
Loan  interest  varies  more  or  less  from  the  marginal 
earnings  of  capital;    but  interest  as  paid  in  money 
accurately  expresses  interest  as  determined  in  kind 
by  the  play  of  economic  forces. 

Conscious  Forecasts  not  necessary  for  Insuring  the 
Adjustment  of  Loan  Interest  to  Chnnging  Prices.  — 
It  is  possible  that,  where  this  subject  has  been  con- 


LEADING    FACTS   CONCERNING   MONEY  549 

sidered,  the  impression  may  prevail  that  this  reduction 
in  the  nommal  rate  of  interest  is  the  result  of  foresight 
on  the  part  of  borrower  and  lender.    According  to  that 
view,  both  parties  look  forward  to  the  time  when  the 
loan  will  be  paid.    The  borrower  sees  that,  although 
by  means  of  his  business  he  may  have  at  the  end  of  a 
yea   five  per  cent  more  of  commodity  in  his  possession 
prices  will  probably  have  fallen  so  as  to  enable  him  to 
realize  in  money  only  four  per  cent.    On  the  other 
hand,  the  creditor  will  see  that  with  four  per  cent  more 
in  money  he  can,  if  he  will,  buy  with  his  principal 
and  interest  five  per  cent  more  than  he  virtually  loaned 
in  commodity.    He  is  satisfied  with  this  increase  •  and 
moreover,  he  is  forced  to  adopt  it,  since  the  natural 
increase  of  real  capital  will  not  enable  a  borrower  to 
pay  more.    The  entrepreneur  will  stop  borrowing  if 
more  is  demanded.    The  whole  adjustment  is  sup- 
posed to  rest  on  a  forecast  made  by  the  contracting 
parties  and  a  speculative  calculation  as  to  the  trend 
of  prices     Now,  while  men  do  indeed  consider  the 
future,  the  adjustment  that  is  actually  made  does  not 
call  for  foresight.     No  conscious  forward  glance  is 
necessarily  involved  therein.    It  is  made  by  a  pro- 
cess that  works  more  unerringly  than  any  joint  calcu- 
lation about  the  coming  conditions  could  possibly  do    * 
_  The  interest  on  a  loan  that  is  to  run  through  a  pe-  ' 
nod  in  the  near  future  is  based  on  the  rate  that  capital 
IS  now  producing.    The  evidence  as  to  what  that  rate 
IS  must  be  furnished  by  the  experience  of  the  imme- 
diate past.    It  takes  much  experience,  of  course 
accurately  to  determine  how  much  the  marginal  unit 
of  capital  for  the  year  189.5  has  been  worth  to  the  men 
who  have  used  it.    This,  however,  has  to  be  ascer- 
tained as  best  it  can.    It  takes  strategy  on  the  part; 


^mm 


550 


ESSENTIALS   OF   ECONOMIC   THEORY 


of  both  borrowers  and  lenders  to  make  the  loan  rate 
correspond  to  the  marginal  earnings.  Here  there  is  a 
chance  for  economic  friction  and  for  variations  from 
the  theoretical  standard,  and  the  loan  rate  will  some- 
times exceed  it;  but  in  the  long  run  the  deviations 
will  offset  each  other.  In  any  case,  the  experience  of 
1906  fixes,  with  or  without  variations,  the  loan  rate 

for  1907. 

The  earnings  revealed  by  the  experience  of  1906 
may  be  theoretically  computed  either  in  money  or  in 
commodity.    Let  us  say  they  have  been  five  per  cent 
in  real  wealth,  but  by  reason  of  the  fall  in  prices  they 
have  been  only  four  per  cent  in  money.    That,  then, 
is  the  rate  for  a  loan  that  is  to  run  through  1907. 
If  prices  continue  to  fall  at  the  rate  now  prevailing, 
the  loan  rate  in  money  will  correspond  to  the  mar- 
ginal earnings  of  capital  for  the  latter  year  as  ac- 
curately as  it  does  for  the  former  year.    Bargain- 
making  strategy,  the  "higgling  of  the  market,"  may 
yield  an  imperfect  result,  and  the  lender  of  real  or 
commodity  capital  may  or  may  not  get  the  exact  real 
earnings  of  marginal  capital  of  the  same  kind.    In 
translating  the  earnings  of  real  capital  for  the  earlier 

Ior  test  year  into  terms  of  money,  the  appreciation  of 
the  coins  has  unerringly  entered  as  an  element.  If 
the  same  rate  of  appreciation  is  continued  through  the 
following  year,  no  deviation  of  the  loan  rate  from  the 
earnings  of  capital  can  result  from  this  cause.  What- 
ever deviation  there  is  results  from  the  other  causes 
just  noted. 

In  commercial  terms  a  man  borrows  "money,'" 
and,  by  using  it  in  his  business,  produces  "money." 
He  does  this,  however,  by  converting  the  currency  into 
merchandise,  and  then  reconverting  this  into  currency. 


LEADING    FACTS   CONCERNING   MONEY  551 

He  gives  to  the  lender  approximately  what  the  "mar- 
ginal "  part  of  the  loan  produces.  If  this  adjustment 
is  inexact,  the  lender  will  get  less  or  more  than  the 
actual  earnings  of  such  capital.  With  money  gaining 
in  its  purchasing  power  at  a  uniform  rate,  the  adjust- 
ment is  as  exact  as  it  would  have  been  with  money  of 
stable  value.  The  appreciation  works  unerringly  in 
translating  earnings  measured  in  goods  into  smaller 
earnings  measured  in  money.  The  loan  rate  ap- 
proximates the  earnings. 

Effects  of  Changes  in  the  Rate  of  Appreciation.  — 
What  happens  if  the  rate  of  appreciation  changes? 
What  if  gold  gains  two  per  cent  in  value,  instead  of 
one,  during  the  second  of  the  periods  ?    The  capitalist 
will  then  clearly  be  a  gainer,  and  the  entrepreneur 
will  be  a  loser.    Getting  five  per  cent  in  commodity 
as  before,  the  business  man,  by  reason  of  falling  prices, 
will  realize  only  about  three  per  cent  in  money.     His 
contract,  based  on  the  experience  of  an  earlier  year 
makes  him  pay  four  per  cent,  and  he  loses  one.     Every 
acceleration  of  the  rate  of  increase  in  the  purchasing 
power  of  money  plays  into  the  hands  of  lenders. 
Every  retarding  of  that  rate  plays  into  the  hands  of 
borrowers.     If  in  1907  the  entreprenexir  gets  a  three 
per  cent  rate  on  what  he  borrows,  as  based  on  the 
experience  of  1906,  and  if  the  fall  in  prices  is  reduced 
during  that  later  year  to  one  per  cent,  the  borrower 
will  make  a  clear  gain  of  one  per  cent ;  and  this  will 
recoup  him  for  his  loss  in  the  earlier  period.     More- 
over, after  a  long  period  of  steady  prices,  the  begin- 
nings of  a  downward  trend  do  not  instantly  affect  the 
loan  rate  of  interest.     A  period  must  elapse  sufficient 
to  establish  the  fact  of  this  downward  trend,  and  to 
enable  the  struggles  of  lenders  and  borrowers  to  over- 


552 


ESSENTIALS  OF  ECONOMIC  THEORY 


come  habit  in  fixing  a  new  rate  that  will  correspond 
to  the  new  earning  power  of  monetary  capital.  These 
facts  explain  what  at  times  looks  like  a  failure  of  the 
loan  market  fully  to  take  account  of  the  fall  of  prices 
during  a  given  interval.  What  that  market  really 
does  is  to  base  the  interest  paid  in  one  interval  on  the 
business  experience  of  another. 

Opposite  Reasons  for  Favoring  Gold  as  a  Basis  of 
Currency.  — Wh&i,  then,  is  our  practical  conclusion? 
Gold  has  surprised  the  world  by  its  increase  and  by  the 
rise  in  prices  by  which  this  change  has  been  attended. 
The  interest  on  loans  has  risen  as  the  conditions  re- 
quired that  it  should  do;  but  the  rise  in  interest  has 
lagged  somewhat  behind  the  rise  in  prices.    The  en- 
larged output  of  the  precious  metal  has  been  com- 
paratively sudden,  and  it  has  been  this  fact  which  has 
played  into  the  hands  of  entrepreneurs  and,  for  a  brief 
interval,  entailed  some  loss  on  lenders.    When  the 
adjustment  of  loan  interest  to  the  rising  prices  shall 
be  fully  made,  neither  of  these  parties  will  gain  at  the 
other's  expense  so  long  as  the  rise  shall  continue  at 
the  prevalent  rate;    but  if  the  rise  should  cease  as 
quickly  as  it  began,  it  would  be  entrepreneurs  who 
would  lose  and  lenders  who  would  gain.     Loans  run- 
ning at  rates  fixed  when  prices  were  rising  would  be 
paid  by  an  amount  of  money  which  would  buy  more 
commodity  than  the  business  would  afford.    With  a 
reduction  of  the  output  of  gold  there  will  come  a  de- 
mand for  some  measure  of  inflation  in  order  that  ris- 
ing prices  may  forever  continue.    Adding  silver  to  the 
currency  would,  as  we  have  seen,  accomplish  this 
purpose  only  temporarily.    In  the  long  run  this  metal 
is  bound  to  appreciate  like  gold.     Using  paper  money 
would  have  a  temporary  effect  and  would  be  a  more 


LEADING   FACTS   CONCERNING   MONEY  553 

dangerous  measure.    Waiting  for  a  short  time  for  a 
new  adjustment  of  loan  interest  to  the  trend  of  prices 
would  be  the  only  rational  course.    Will  the  further 
fall  of  prices  rob  the  entrepreneurs  f    They  must  pay 
only  the  rate  of  interest  that  capital  earns.    If  that  is 
five  per  cent,  five  they  must  pay,  so  long  as  prices  are 
stable.    With  prices  falling  by  one  per  cent  a  year, 
they  will  have  to  pay  only  four.    Will  the  fall  check 
business  and  make  men  afraid  to  buy  stocks  of  goods  ? 
They  can  carry  stocks  as  cheaply  with  a  four  per  cent 
rate  of  interest  and  declining  prices  as  they  can  with 
a  five  per  cent  rate  and  stable  prices.    Will  it  blight 
enterprise  by  making  men  afraid  to  build  mills,  rail- 
roads, etc.?    Here  again  the  loan  rate  of  interest 
comes  to  the  rescue  of  the  projectors.    If  they  can 
float  their  bonds  and  notes  at  a  lower  rate,  they  can 
build  with  impunity. 

Steadiness  is  the  vital  quality  in  currency.  Let 
its  purchasing  power  be  either  unchanging  or  steadily 
changing  in  either  direction,  and  justice  will  be  done 
and  business  will  thrive.  If  a  metal  fluctuates  greatly 
in  its  rate  of  increase  in  value,  it  is  a  poor  coinage 
metal,  even  though  the  average  rate  of  gain  be  slow; 
if  it  gains  slowly  and  steadily,  it  is  almost  an  ideally 
good  one. 

What  would  be  the  effect  of  any  practical  measure 
of  inflation?  If  we  use  as  money  available  for  all 
debts  the  present  stock  of  silver  in  the  world,  we  make 
one  large  addition  to  the  volume  of  money  now  avail- 
able. We  start  an  inflation  that  cannot  continue  by 
the  use  of  silver  alone.  In  the  hope  of  perpetuating 
the  rise  in  prices  we  may  follow  the  silver  with  paper. 
By  the  action  of  the  principle  that  we  have  stated 
we  shall  thus  make  the  interest  on  loans  higher,  and 


554 


ESSENTIALS  OF   ECONOMIC  THEORY 


every  man  who  buys  a  farm  or  a  house  while  the  infla- 
tion continues  will  pay  a  high  rate  of  interest  on  an 
enlarged  purchase  price.    When  we  are  forced  to  stop 
the  paper  issues,  as  in  the  end  we  must  be,  the  price 
of  the  land,  etc.,  will  fall,  and  the  rate  of  interest  on 
new  loans  will  fall  also.    The  price  of  all  produce  will 
go  down,  and  the  purchasers  of  property  will  struggle 
again,  as  in  the  years  following  the  Civil  War  men 
had  to  struggle,  with  a  fixed  debt,  a  fixed  rate  of  inter- 
est, and  falling  prices.    The  early  post  helium  days 
will  be  reproduced.    Entering  on  a  policy  of  inflation 
would  therefore  be  inviting  men  again  to  suffer  what 
those  suffered  whose  hard  experience  is  so  frequently 
depicted  in  Populistic  literature.    Conceding  all  that 
is  claimf  d  as  to  the  evil  that  comes  from  buying  or 
mortgaging  real  property  while  the  volume  of  money 
is  increasing  and  payir.*',  the  debt  so  incurred  while 
that  volume  is  relatively  contracting,  one  must  see 
that  a  policy  of  inflation  would  end  by  inflicting  exactly 
that  evil  on  new  victims,  unless  a  method  can  be  in- 
vented by  which  the  inflation  can  continue  forever. 
Far  better  will  it  be  to  endure  the  transient  evil  which 
a  slow  change  in  the  supply  of  gold  will  bring.    Re- 
taining gold  through  all  its  minor  variations  will 
mean  all  the  prosperity  and  all  the  justice  that  any 
monetary  t  ystem  can  insure.    If  we  shall  ever  abandon 
this  metal,  experience  will  make  us  wise  enough  to  re- 
turn to  it ;  but  we  shall  have  paid  a  high  price  for  the 
wisdom. 


^MM^ 


fm^i^r./iimf 


CHAPTER  XXX 


SUMMARY  OF  CONCLUSIONS 

Perpetual  change  is  the  conspicuous  fact  of  mod- 
ern life.    So  revolutionary  are  the  alterations  which 
a  few  decades  make  in  the  industrial  world  as  to  raise 
the  question  whether  there  are  economic  laws  which 
retain  their  validity  for  any  length  of  time.    If  there 
are  not,  we  have  one  economic  science  now,  and  shall 
have  a  different  one  ten  years  hence  and  a  widely 
dissimilar  one  a  century  later.    Of  Descriptive  Eco- 
nomics thts  is  true,  since  it  changes  with  the  world  it 
describei;    but  it  is  not  true  of  Economic  Theory. 
There  are  certain  principles  which  are  equally  valid 
in  all  times  and  places.    They  were  true  in  the  begin- 
nings of  industry-,  are  true  now,  and  will  remain  so  as 
long  as  men  sl-all  create  and  use  wealth.    They  are 
not  made  antiquated  either  by  technical  progress  or 
by  social  evolution.    We  have  at  the  outset  stated 
some  of  these  truths.    They  have  reference  to  man, 
to  his  natural  environment,  and  to  the  interactions  of 
the  two,  and  they  do  not  depend  on   the   relations 
of  man  to  man.    We  have  also  stated  other  economic 
truths  which  apply  only  to  man  in  a  social  state.    They 
are  not  universal,  but  are  so  general  that  they  are 
exemplified  in  the  economic  life  of  every  society,  from  i 
the  most  primitive  to  the  most  highly  civilized.    They 
are  the  principles  of  Social  Efonomic  Statics,  and  in 
order  to  have  them  distinctly  before  us  we  have  created  f 
in  imagination  a  society  which  is  changeless  in  size, 

665 


556 


ESSENTIALS   OF   ECONOMIC  THEORY 


in  form,  and  in  mode  of  economic  action.  In  such  a 
condition  the  wages  of  labor  would  remain  fixed,  as 
would  also  the  interest  on  capital.  Wages  and  interest 
would  absorb  the  whole  product  of  social  industry; 
for  the  static  condition,  as  we  have  thus  created  it, 
excludes  profits  of  the  entrepreneur.  In  broad  out- 
line this  describes  the  condition  toward  which  certain 
economic  forces  are  continually  impelling  the  actual 
world. 

There  is  at  each  period  a  standard  shape  and  mode 
of  action  to  which  static  laws  acting  by  themselves 
would  bring  economic  society.  This  social  norm, 
however,  is  not  the  same  at  any  two  periods.  The 
static  laws  remain  uncharged,  but  they  act  in  chang- 
ing cond'.tiDns,  and  if  Lhey  were  left  alone  and  undis- 
turbed, would  give  one  result  in  1907  and  another  in 
2007.  The  changes  which  a  century  will  bring  should 
make  society  larger  and  richer,  the  mode  of  production 
more  effective,  and  the  returns  for  all  classes  greater. 
The  laws  which  set  the  standard  of  wages  and  interest 
will  remain  the  same,  but  if  the  tendencies  now  at 
work  have  their  natural  effect,  all  these  incomes  will 
be  larger.  It  is  as  though  great  quantities  of  water 
were  rushing  into  a  lake  and  causing  disturbances 
and  upheavals  of  the  surface.  If  the  inflow  should 
now  stop,  the  surface  would  subside  to  a  general  level. 
If  the  inflow  should  recommence,  go  on  for  a  hundred 
years,  and  then  stop,  the  surface  would  again  subside 
to  a  level,  but  it  would  be  higher  than  the  former  one. 

I  Yet  the  larvs  of  equilibrium  which  produced  the  first 
static  level  wouM  be  identically  the  same  as  those  which 
produced  the  second.  Social  Economic  Statics  is  a 
body  of  principles  which  act  in  every  stage  of  civiliza- 
tion and  draw  society  at  every  separate  period  toward 


^     ■.  i*»i  *.  Vi 


SUMMARY   OF   CONCLUSIONS 


557 


|a  static  norm,  though  they  do  not  at  any  two  periods 
/draw  it  toward  the  same  norm.  They  make  actual 
society  hover  forever  about  a  changing  standard  shape. 
The  laws  which  govern  progress  —  which  cause  the 
social  norm  to  take  a  different  character  from  decade 
to  decade,  and  cause  actual  society  to  hover  near  it  in 
its  changes  —  are  the  subject  of  Social  Economic  Dy- 
namics. We  have  made  a  study  of  the  more  general 
economic  changes  which  affect  the  social  structu. .-, 
and  they  stand  in  this  order :  — 

(1)  Increase  of  population,  involving  increase  in  the 
supply  of  labor. 

(2)  Increase  in  the  stock  of  productive  wealth. 
/     (3)   Improvements  in  method. 

I  (4)  Improvements  in  organization. 
1  AH  these  things  affect  the  productive  power  of 
teociety,  and  correlated  with  them  and  standing  over 
bgainst  them  is  a  fifth  type  of  change,  which  affects 
Consumers'  wants  and  determines  how  productive 
power  shall  be  used. 

We  have  examined  each  single  change  by  itself  and 
have  then  endeavored  to  combine  them  and  get  the 
grand  resultant  of  all.  Beginning  with  the  increase 
of  population,  we  have  traced  its  effects  on  wages, 
on  interest,  and  on  the  values  of  goods.  We  have 
made  a  similar  study  of  the  growth  of  capital,  the 
progress  of  technical  method,  and  the  organization  of 
industry. 

The  variation  of  economic  society  from  its  static 
standard  offers  a  problem  for  solution,  and  in  this  con- 
nection the  type  of  change  in  which  the  most  serious 
evils  inhere  is  that  which  discards  old  technical  meth- 
ods and  ushers  in  new  ones.  The  question  whether 
these  evils  are  destined  to  increase  or  to  diminish  we 


558 


ESSENTIALS   OF  ECONOMIC  THEORY 


have  answced  conditionally  on  the  basis  of  past  ex- 
perience and  present  tendencies.  If  competition 
continues  and  labor  retains  its  mobility,  the  evils 
will  naturally  grow  less.  The  grand  resultant  of  all 
the  forces  of  progress  is  an  upward  movement  in  the 
standard  of  economic  life  gained,  not  without  cost, 
but  at  a  diminishing  cost. 

A  vital  question  is  that  of  the  continuance  of  the 
movements  now  in  progress.     Do  any  of  them  tend 
to  bring  themselves  to  a  halt?    Is  any  change  on 
which  we  rely  for  the  hopeful  outlook  we  have  taken 
self-terminating?    We  have  found  that  the  growth 
of  population  tends  to  go  on  more  slowly  as  the  world 
becomes  crowded,  while  the  motives  for  an  increase 
of   productive   wealth   grow   stronger   rather   than 
weaker.    Technical  progress  gives  no  hint  of  coming 
to  an  end,  and  improvements  in  organization  may  go 
on  indefinitely,  though  they  will  naturally  go  on  more 
slowly  as  the  modes  of  marshaling  the  agents  of  pro- 
duction are  brought  nearer  to  perfection.     Knowledge 
of  the  causes  of  economic  change  is  at  best  incomplete, 
and  enlarging  it  by  the  statistical  method  of  study 
will  be  a  chief  work  for  the  economists  of  the  future. 
Analytical  study  points  distinctly  to  a  coming  time 
of  increased  comfort  for  working  humanity.    Prog- 
ress gives  no  sign  of  being  self-terminating,  so  long  as 
the  force  which  has  been  the  mainspring  of  it,  namely, 
competition,  shall  continue  to  act. 

The  suspicious  element  in  the  general  dynaniic 
movement  is  progress  in  organization.  That  which 
we  have  primarily  Ludied  is  the  marshaling  of  forces 
for  mere  production  —  the  creation  of  efficient  mills, 
shops,  railroads,  etc.  This,  however,  carries  with  it  a 
tendency  to  create  large  mills,  shops,  and  railroad 


SUMMARY   OF  CONCLUSIONS 


559 


systems,  and,  in  the  end,  to  combine  those  which  begin 
as  rivals  in  a  consoHdation  in  which  their  rivalry  with 
each  other  ceases.  This  means  a  danger  of  monopoly, 
and  is  the  gravest  menace  which  hangs  over  the  future 
of  economic  society. 

If  anything  should  definitely  end  competition,  it 
would  check  invention,  pervert  distribution,  and  lead 
to  evils  from  which  only  state  socialism  would  offer 
a  way  of  escape.    Monopoly  is  not  a  mere  bit  of  fric- 
tion which  interferes  with  the  perfect  working  of 
economic  laws.    It  is  a  definite  perversion  of  the 
laws  themselves.    It  is  one  thing  to  obstruct  a  force 
and  another  to  supplant  it  and  introduce  a  different 
one ;  and  that  is  what  monopoly  would  do.    We  have 
inquired  whether  it  is  necessary  to  let  monopoly  have 
its  way,  and  have  been  able  to  answer  the  question 
with  a  decided  No.    It  grows  up  in  consequence  of 
certain  practices  which  an  efficient  government  can 
stop.    Favoritism  in  the  charges  for  carrying  goods 
is  one  of  these  practices.    Railroads  have  become 
both  monopolies  and  builders  of  other  monopolies. 
Certain  principles,  which  we  have  briefly  outlined, 
govern  their  policy,  and  the  natural  outcome  of  their 
working  is  consolidation.    This  creates  the  necessity 
for  a  typ"?  of  public  action  which  is  new  in  America  — 
the  regulation  of  freight  charges. 

Akin  to  this  is  the  necessity  for  keeping  alive  com- 
petition in  the  field  of  general  industry  by  an  effective 
prohibition  of  various  measures  by  which  the  great 
corporations  are  able  to  destroy  it.  The  dynamic 
element  in  economic  life  depends  on  competition, 
which  at  important  points  is  vanishing,  but  can,  by  the 
power  of  the  state,  be  restored  and  preserved,  in  a  new 
form,  indeed,  but  in  all  needed  vigor.    With  that 


560 


ESSENTIALS   OP   ECONOMIC   THEORY 


accomplished  we  can  enjoy  the  full  productive  effect 
of  consolidation  without  sacrificing  the  progress  which 
the  older  type  of  industry  insured. 

The  organization  of  labor,  its  motives,  its  measures, 
and  its  tendencies,  —  including  a  tendency  toward 
monopoly,  —  we  have  examined.  Through  all  the 
wastes  and  disturbances  which  the  struggle  over  wages 
occasions  we  have  discovered  a  certain  action  of  nat- 
ural economic  law,  and  have  seen  what  type  of  meas- 
ures, on  the  part  of  the  state,  will  remove  impediments 
in  the  way  of  that  law  and  enable  it  to  act  in  greater 
perfection. 

Connected  with  the  dynamic  movement  on  which 
the  future  of  society  depends  are  the  policies  of  the 
government  in  connection  with  currency  and  with 
ctive  duties.    Here,  less  action,  rather  than  more, 


iVOX- 


is  demanded  on  the  part  of  the  state.  While  no  re- 
newal of  a  laissez-faire  policy  is  possible,  a  reduction 
of  the  duties  which  now  play  into  the  hands  of  monop- 
oly is  distinctly  called  for.  In  connection  with  cur- 
rency a  greater  trust  in  nature  and  a  smaller  reliance 
on  governments  will  give  the  best  results. 

Our  studies  have  included,  not  the  activities  of  the 
whole  world,  but  those  of  that  central  part  of  it  which 
is  highly  sensitive  to  economic  influences.  The  whole 
producing  mechanism  here  responds  comparatively 
quickly  to  any  f^  -  vhich  makes  for  change.  This 
society  par  exceuv.^e  is  extending  its  boundaries 
and  annexing  successive  belts  of  outlying  ter.'tory; 
and  as  chis  shall  go  on,  it  nmst  bring  *he  world  as  a 
whole  more  and  more  nearly  into  the  shape  of  a  sii.  "^le 
economic  organism.  The  relations  of  the  central  so- 
ciety to  the  unannexed  zones  are  attaining  transcen- 
dent importance,  and  a  fuller  treatment  of  Economic 


SUMMARY   OF  CONCLUSIONS 


561 


Dynamics  than  is  possible  within  the  limits  of  the 
present  work  would  give  much  space  to  such  subjects 
as  the  transfonnation  of  Asia  and  the  resulting  changes 
in  the  economic  life  of  Europe  and  America.    Here 
again  the  conscious  action  of  the  people  determines  the 
economic  outcome.    In  the  main  we  can  still  leave  the 
natural  forces  of  industry  to  work  automatically ;  but 
we  have  passed  the  point  where  we  can  safely  leave  to 
self-regulation  the  charges  of  the  common  carrier, 
the  conduct  of  monopolistic  corporations,  or  certain 
parts  of  the  policy  of  organized  labor.    Foreign  rela- 
tions are,  of  course,  a  subject  for  public  control,  and 
they  are  coming  to  affect  in  a  most  intimate  way  our 
own  economic  life.    Everywhere  our  future  is  put 
into  our  own  hands  and  will  develop  the  better  the 
more  we  know  of  economic  laws  and  the  more  energy 
we  show  in  applyingthem.    The  surrendering  of  indus- 
tries generally  to  the  state  may  be  avoided,  and  the 
essential  features  of  the  system  of  business  which  evo- 
lution has  created  may  be  preserved ;  but  to  keep  this 
system  free  from  unendurable  evils  will  require,  on 
the  part  of  the  people,  a  rare  combination  of  intelli- 
gence and  determination.    It  will  require  a  public 
policy  that  shall  neither  be  hampered  by  prejudice 
nor  incited  by  ebullitions  of  popular  feeling,  but  shall 
be  guided  through  a  course  of  difficult  action  by  a 
knowledge  of  economic  law. 


so 


INDEX 


Abstinence,  339  et  aeq. 

Accumulation,  the  law  of,  Ch. 
XX. 

Altruism,  39. 

Arbitiition,  469,  Ch.  XXVI; 
as  affected  by  nionofX)ly,  483 
et  seq.  ;  cotiipulsorv,  489-4y(), 
497-498,  502;  voluntary,  493 
et  seq. 

Birth    rate,  as   affected   by  eco- 
nomic conditions,  328  et  seq. 
Bohm-Bawerk,  17  note,  33. 
Boycott,  Ch.  XXVII. 

Ca '-canny,  509  et  seq. 
Capital,  '  19,    24-26,    31-33;     as 
affected    by    improvements    in 
method,  Ch.   XVIII;    as  orig- 
inating   in    profits,    230,    301  ; 
contra.sted  with  capital  goods, 
28-34;     exportation    of,    230- 
235;     ground    and     auxiliarj-, 
166;    mobility  of,  37-38,   127- 
128,   151-152;    primitive,   1-2; 
rent  of,    170-171  ;    sources  of, 
353    et    seq.;     waste    of,   307 
et  seq. 
Capital,  accumulation  of,  Ch.  XX  ; 
as  affected  by  monoiX)ly,  355- 
357 ;    as  affected  by  standards 
of  living,  342  et  seq. 
Capital,    effects    of    increase    of, 
203-204 ;    on   economic   struc- 
ture   of   society,    246-248;     on 
interest,    319-320;     on    wages, 
316  et  seq. 
Capital    goods,    16,    17,    19    note; 
active,  20  et  seq.;    active   and 
passive,     186-187 ;     eontrasto<l 
with    capital,  28-34;     passive 
20  et  srq. 
Capitalist,  84-85,  117. 
Capitiiiizaliim  of  railways,  proper 
basis  of,  445-449. 


663 


Caste,  effect  on  increase  of  pop- 
ulation, 332;    effect  on  values, 
268. 
Centralization  of  production,  200- 

201,  289. 
Collective  bargaining,  467  et  seq. 
Combination,  railway,  419  et  seq., 

433  et  seq. 
Commerce,  effect  on  diffusion  of 
methods,   229;    effect  on  emi- 
gration and  immigration,  229- 
230. 
Competition,     67,    75-77,    note; 
143-15(.t,   198  et  seq.;  effect  on 
in%'entions,  302   et  seq.  ;    effect 
on    labor    organizations,    488- 
490;     in    transportation,    406, 
419-420,  4-.',«  rt  .irq.;  relation  to 
progress,  533-534. 
Competition    of    markets,    effect 
on  railway  charges,  403  et  srq. 
Competition,  potential,  as  a  regu- 
lator of  monopolies,  380  et  seq. 
Conciliation,  490  et  seq. 
Consolidation,    382-383,    390    el 
seq.,     534     et     seq.,     558-559; 
effect   on   strikes,   464   et   seq.; 
of    railways,    396-397,    419    et 
seq. 
Consumers'  goods,  25-26,  34. 
Consumers'  rent,  172  note,  173. 
Consumers'  surplus,  105. 
Consumption,    24-25,    note ;     aa 
affected    by   improvemeits    in 
methods,     273-274;      by     in- 
creased productive  power,  305- 
306 ;    by  increase  of  individual 
incomes,    292 ;     diversification 
of,  32-63,  206-207. 
Corporations,  376  et  seq. 
Cost,   130;    contrasted  with  util- 
ity, 43-44;    elements  of,    ll.'i- 
116;    fixed  and  variable,  412  ^/ 
■leq.;    in  static  state,    132-133; 
law  of  increasing,  44-47;  low- 


564 


INDEX 


est,  as  determinant  of  standard 
price,  263-264 ;  measurenioiit 
of,  47-49,  209;  relation  to 
final  utility,  53-54 ;  relation 
to  incomes,  126;  relation  to 
price,  114-115;    specific,  45. 

Demand  and  supply,  93-94,  96. 

Demand,  reciprocal,  202. 

Demand,  relation  to  final  utility, 
97. 

Diminishing  productivity,  148- 
149;   of  labor,  134  et  s'eq. 

DiminiHhing  returns,  56 ;  in  agri- 
culture, 165-166,  398  et  seij.; 
in  manufactures,  398-399. 

Diminishing  utility,  law  of,  98. 

Distribution,  (M);  contrasted  with 
production,  Cli.  V;  functional 
and  personal,  89-91 ;  group, 
92-93. 

Division  of  labor,  61  et  aeq. 

"Dumping,"  526. 

Dynamic  influences,  130-132,  195 
et  seq. 

Dynamics,  Ch.  XII. 

Economics,  1  ct  seq.,  61. 
Education,  effect  on  increase  of 

population,  330-331. 
Effective  utility,  8  note,  54  note. 
Eight-hour    movement,    514-516. 
Entrepreneur,  83  et  seq.;    117  et 

seq.;     153   et  seq. ;    in  dynamic 

state,  123-124 ;  in  static  state, 

121-122. 
Exchange,  63-64. 

Factory     legislation,     effect     on 

increase    of    population,    331- 

332. 
Final    productivity,  139    et   aeq., 

156-157. 
Final  utility,  8  note,  51  note,  54 

note,  98-99 ;    relation  to   cost, 

53-54 ;     relation    to    demand, 

97. 
Free  coinage,  538-539. 
Free  trade,  arguments  for,  231, 

518-519. 
Friction,  economic,  373. 
Future,    undervaluation    of,    345 

et  seq. 


Giddings,  F.  H.,  381. 
Government  ownership,  378,  383- 

385. 
Groups,  economic,  64  et  seq. 

Immigrants,  disadvantages  of, 
245  et  seq. 

Improvements  in  metliods,  204, 
212;  as  source  of  new  capital, 
2.'10 ;  effect  on  capital,  Ch. 
XVllI;  effect  on  labor,  312 
et  seq. ;  effect  on  ((Uality  of 
goods,  273-274 ;  in  backward 
regions,  235-236. 

Increa.sing  returns,  398—401. 

Inflation,  effe<'ts  of,  539  et  seq. 

Interest,  85,  Ch.  IX  ;  as  affected 
by  changes  in  tiie  value  of 
money,  543  et  aeq. ;  as  affe<;tcd 
by  increase  of  capital,  319-320; 
rate  of,  effect  on  the  accumu- 
lation of  capital,  3.39  et  seq.; 
real  and  loan,  547  et  seq. ;  re- 
lation t  rent,  182-184 ;  static, 
224-225. 

Inventions,  204,  Chs.  XVI,  XVII ; 
as  affected  by  competition, 
362  et  seq. ;  as  affected  by  mo- 
nopoly, 362  et  seq. ;  conditions 
giving  rise  to,  Ch.  XXI;  ef- 
fect on  capital,  Ch.  XVIII; 
on  economic  structure  of  so- 
ciety, 249  et  seq.;  on  labor, 
254-255 ;  effects  of  a  series 
of,  290  et  seq. 

Ke-.tel,  392. 

Labor,  35 ;  as  a  measure  of  cost, 
209 ;  as  affected  l)y  improve- 
ments in  method,  312  et  seq.; 
classification  of,  13-15;  defi- 
nition of,  9-10,  82-85;  di- 
minishing productivity  of,  134 
et  seq.;  division  of,  61  et  seq.; 
managerial,  116-117;  mobil- 
ity of,  127-128,  133-134;  mo- 
nopoly, 471  et  seq.,  504 ;  prod- 
uctivity of,  17-18,  133  et  seq. ; 
protective,  10-11;  rent  of, 
171-172. 

Labor  organization,   Ch.   XXV. 

Labor-saving  devices.  Chs.  XVI. 
XVII;      effect     on     economic 


INDEX 


565 


structure  of  society,  249  et 
eeq.;   effect  on  labor,  254-255. 

Lainaet-faire,  384-385,  39(). 

Land,  9,  36-37,  Ch.  XI;  con- 
trasted with  artificial  capital 
goods,  178-179,   188-190. 

Machinery,  72-73. 

Malthus,  321  et  seq. 

Margin  of  cultivation,  165  el  seq. 

Marginal  ui;lity.  ol  note. 

Market,  95  note. 

Market  price,  93-94. 

Mill,  J.  S.,  22()  note,  257. 

Money,  29-30;   Ch.  XXIX. 

MonoiKjly,  201,  5.^9-5(10;  a.s 
affected  by  pati  nt.s,  307-368; 
as  limiting  employment,  297- 
208;  effect  on  accumulation, 
355-357;  on  inventions,  302- 
303;  on  progress,  Ch.  XXII  ; 
on  standard  of  living,  323; 
government  ownership  of,  3V'S, 
383-385;  in  transportation, 
435  et  seq.;  inventor's,  360  et 
seq.;  labor,  456,  402,  407,  471 
et  seq.,  504;  nature  of,  380; 
public  character  of,  389;  re- 
lation to  arbitration,  483  et 
seq.;  relation  to  protection, 
525  et  teq.;  relation  to  railway 
discrimination,  396-397 ;  re- 
stricted by  potential  compe- 
tition, 380  et  seq. 
Monopoly  price,  as  affected  by 
increase  of  wages,  479-480. 

Organization    of    industry,    205, 

318-319,  308  et  seq. 
Organization  of  labor,  Ch.  XXV. 

Paper  Money,  552-554. 

Patents,  205-266 ;  abuse  of,  361  ; 
as  a  means  of  curbing  mo- 
nopolies, 367-308;  justification, 
360-361. 

Patten,  S.  N.,  207  note. 

Political  Economy,  3  note,  61. 

Pool,  302. 

Population,  as  affected  by  factory 
legislation,  331  ;  as  affected 
by  increawe  of  wealth,  333 ;  as 
affected  by  rise  of  wages,  335 
«t  seq.;    distribution  of,  215  et 


seq.;  effect  of  increase  of,  203, 
244  et  seq.,  315  et  seq.;  law 
of,  Ch.  XIX. 

Population,  density  of,  215-216; 
effect  on  industry,  237  et  seq.; 
effect  on  wagis,  241-243. 

Population,  in(  reuse  of,  ao  af- 
fected by  caste,  332;  by  edu- 
cation, 330-331  ;  by  standanl 
of  living,  324  et  seq. 

Price,  97  ;  a.s  u(Teet«il  by  inflation, 
539  et  seq. ;  determination  of, 
93-90  ;  e(|ualizati<>n  of,  98-100 ; 
market,  93-94  ;  nioi'opolv,  479- 
4S0;  normal,  114,  120-121;  of 
complex  goods,  100  ct  seq.;  re- 
lation to  co.st,  114;  standard, 
determined  bv  lowest  cost,  263- 
204,  285-288;  static,  202-203, 
224. 

Production,  contrasted  with  dis- 
tribution, Ch.  V;  requisites  of 
15-16. 

Productivity,  42-43;  as  basis 
for  arbitration  awards,  475  et 
acq.;  final,  139  et  .leq.,  148-149, 
157;    mensiirement  of,  55-60. 

Profit,  77  note,  85  et  seq.,  119-122 
note,  129  note,  373;  as  af- 
fected by  inflation,  539  et  seq.; 
as  source  of  capital,  301,  354- 
3.55;  in  static  .'^Inte,  87. 
Protection,  Ch.  XXVIII,  560; 
argument  for,  520  et  seq.;  r:- 
If.tion  to  monopoly,  525  et  seq. 

Rae,  John,  17  note. 

Railway  capitalization,  proper 
basis  of,  440—150. 

Railway  charges,  Ch.  XXIV;  as 
affected  by  <<)nipetition  of 
markets,  403  et  seq.;  limits  of, 
403  et  .leq.  ;  state  regulation  of, 
439  ct  seq. 

Railway   consolidation,    396-397, 

419  et  .teq. 

Railway  discriminations,  as  creat- 
ing monopohes,   393-394,  390, 

420  et  .teq. 

Rent,  Ch.  X;  as  differential 
product,  163-165;  as  product 
of  land,  162-163;  consumers', 
172-173  note;  gross  and  net, 
180-183;    of  capital,   170-171; 


566 


INDEX 


of  concrete  instniinent«,   174- 
177;    of   labor,    171-172;    re- 
lation    to     interest,     182-184 
relation     to     price,     191-194 
traditional    formula,    160-162 
universality  of  principle,   177- 
178. 

Ricardo,  121,  160,  179. 

Risk,  122,  123  note,  214. 

8o<-ial  Economics,  3  note,  61. 

Socialism,  378.  384-386,  395,  397. 

Socialistic  state,  group  organiza- 
tion in,  71. 

Specific  utility,  8  note. 

Standard  of  living,  322  et  teq., 
342  et  seq. 

Static  state,  132-133. 

Strike,  sympathetic,  505. 

Strikes,  cfTcctivencss  under  vary- 
ing conditions,  462  et  seq. 

Substitution,  267  H  seq. 

Supply  and  demand,  93-97. 

Supply,  normal,  114. 

Surplus,  consumers',  105. 

Tariff,  relation  to  trusts,  52S  et  seq. 

Trade  union,  power  of,  under 
varying  conditions,  462  et  seq. ; 
restriction  of  membership,  503- 
604;  restriction  of  output, 
509  et  seq. 

Transportation,  Chs.  XXIII, 
XXtV  ;  as  affected  by  dimin- 
ishing returns  in  agriculture, 
398  et  seq.;  monopoly  in,  435 
et  ceq. 

Trusts,  201,  369-371,  391-392; 
as  affected  by  railway  discrim- 
inations, 393-394;  methods  of 
stifling  competition,  394-395, 
527-528 ;  relation  to  tariff,  528 
et  seq. 

Tuttle,  C.  A.,  34  note. 


Union  label,  506  et  leq. 

Utility,  absolute,  54  note;  con- 
trasted with  cost,  43-44;  di- 
minishmg,  98 ;  effective,  54  note ; 
elementary,  11-12;  final,  61 
note,  54  note,  97-98;  form,  12; 
marginal,  61  note;  measure- 
ment of.  40  et  seq.;  of  pro- 
ducers' goods,  42-43;  place, 
12-13;    varieties  of,  7-8. 

Value,  40-42,  99-101;  affected 
by  caste,  268;  in  primitive 
conditions,  50-51 ;  natural,  94- 
95 ;  normal,  Cli.  VII ;  of  com- 
plex goods,  100  et  seq.;  static, 
124-125,  202-203. 

Value  of  service  principle,  405 
et  seq. 

Violence  in  labor  disputes,  457 
et  seq. 

Wages,  Ch.  VIII,  85,  86;  as 
affected  by  improved  methods, 
299-300 ;  as  affected  by  im- 
proved organization  of  in- 
dustry, 318-319;  as  affected 
by  increase  of  capital,  316  et 
seq.;  as  affected  by  inferior 
bargaining  power  of  labor,  452 ; 
as  affected  by  organization  of 
labor,  Ch.  XXV;  increase  of, 
effect  on  monopoly  price,  479- 
480;  law  of,  143  et  seq.;  rise 
of,  effect  on  monopoly,  335 
et  seq. ;  static,  224-225. 

"Waiting,"  187-188. 

Wants,  changes  in,  206;  elas- 
ticity of,  relation  to  improve- 
ments in  methods,  267  et  seq. 

Wealth,  5-9;  increase  of,  effect 
on  population,  333. 

Webb,  Sidney  &  Beatrice,  357. 


By  JOHN  BATES  CLARK 

Professor  of  Political  Economy,  Columbia  UnivtrsUy 

The  Distribution  of  Wealth 

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inspirations  Its  illustrations,  even  its  independence  of  the  opinions  of 
others,  are  American;  but  its  originality,  the  brilliancy  of  its  reasonine 
and  Its  completeness  deserve  and  will  surely  obuin  for  it  a  place  in  the 
^AJ^em"^  ""^  **•  ^^^'^■''-'^'  '"  »''«  '^'""'''  of'^-  Ameria^ 

"  Professor  Clark's  book  deserves  more  attention  from  general  readers  than 
they  are  accustomed  to  bestow  upon  works  on  abstract  economics  It  is 
indeed,  a  book  written  by  an  economist  for  economists,  but  its  style  its 
clear  and  basic  thought,  illuminates  a  subject  which  the  thinking  pubUc 
continually  discusses. '—r-t*  Ojtf/oD*.  r  f""mw 

The  Control  of  Trusts 

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Power  of  nonopoiy  by  a  Natural  rietliod 

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"  ^°^  T'^  ^^  Professor  Clark  something  to  say,  but  he  says  it  with  such  force 
and  brevity  that  the  busiest  man  or  woman  can  find  time  to  listen  to  him 
Moreover,  he  understands  the  rare  art  of  writing  a  preface.  1  he  straieht- 
away  manner  in  which  he  outlines  the  scope  of  his  book  reminds  one  of 
the  famous  first  lines  in  Macaulay's  'History  of  England."  and  promises 
much  which  this  book  fulfils."  — i?orf(7«^A/^rt«r.  .   »""  promuc 

The  Problem  of  Honopoly 

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tlie  Natural  Mode  of  Averting  1^ 

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A  ^^  of  lectures  first  delivered  at  Cooper  Union,  New  York,  dealing  with  •  - 
1  he  Growth  of  Corporations;  the  Sources  of  tne  Corporations;  Powers 
tor  tvil ;  Great  Corporations  and  the  Lkw  ;  Organized  Labor  and  Monop- 
oly;  Agriculture  and  Monopoly ;  Governmental  Monopolies. 

"  ^^^1  '^  ^Y^  valuable  analysis  in  the  book  and  its  reading  would  give  a 
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